Use Margin Trading to your Benefit



The concept of online margin trading is more misunderstood than used. This is primarily due to lack of proper understanding of this concept. It is essential that investors who wish to trade in the secondary markets understand the benefits as well as pitfalls of margin trading. For beginners, the concept essentially involves trading using short-term debt. However, in this case, the trader or investor does not use only his money to invest. Investors utilize the services of a broker to partly fund the costs of trading. In effect, to undertake margin trading, the investor invests a portion of his money while his broker invests the remaining money to trade on the investor’s behalf.

So How Does Online Margin Trading Work?

The premise of margin trading is that using borrowed funds, one can buy much more stocks or securities than one could possibly do with one’s own funds. To get started, one needs to set up a trading account with a broker or an online brokerage firm and also deposit a certain minimum sum to activate the account.

This minimum sum may differ from broker to broker and may depend on the personal relationship between the investor and the broker. In most countries, the regulatory bodies for stock exchanges also specify certain minimum net worth requirements for brokers, so that greater accountability may be maintained. Before trading, the broker may insist that his client put some collateral which he/she can use himself to raise debt from the market.

Using these funds, a broker is able to invest in stocks and futures. Using these funds, a broker can buy say 1000 stocks by just paying for 200 stocks. If the price of the stock rises, the broker sells off the stocks and any profit made on the investment is transferred to the investor. However, in cases where the transaction results in a loss, the minimum margin money invested by the investor might fall short of requirements. In such cases, broker might make a ‘margin call’ wherein the investor would be required to pay for any shortfall in funds.

Using Margin Trading To Benefit

Margin trading is a speculative activity wherein an investor attempts to make a profit anticipating certain market conditions. Like most speculative activities, the net result of a trading transaction may be a profit or loss. However, in margin trading, the main benefit is the ability to use leverage and speculate without investing the entire amount required to purchase, say, foreign exchange or stocks. The real skill lies in the broker being able to identify the right investment opportunity, which could create profit for his client.