What is Trading on Margin/ Leverage?

Hi guys, today I wanted to talk about what Margin and Leverage are, the benefits and drawbacks of them and whether you should be using them.

Trading on Margin is basically the act of borrowing money from your broker to be able to buy more stocks/ cryptocurrencies/ commodities than you would be able to if you only used the amount of money you have in your bank account. This is a way to boost your purchasing power and therefore trading larger positions.

For example, if you are trading on 50% Margin and you have $10,000 in your trading account, you can actually buy up to $20,000 worth of assets.

That type of Margin is Initial Margin, however there is another type of Margin that you need to be aware of and this is called Maintenance Margin. Maintenance Margin is the smallest amount of money that you can have in your account whilst in a long/short position before your broker requires you to add more money. If you come to have less than this amount in your account then your broker can close out your position(s) if you do not add more money immediately (sometimes you get 24 hours). You will be notified by your broker if the money in your account falls below the maintenance level and this is called a Margin Call.

Therefore, it is a good idea to research your broker's particular margin requirements and to only trade with the full amount of money in your account minus an amount of money that will stop you from being margin called if your position goes heavily against you.

So that was Margin, now what is Leverage? Well, Leverage is a byproduct of Margin and is what actually allows you to control the bigger positions. It is expressed as a ratio rather than a percentage. For example, if you have a 50% initial Margin (and so you can control twice the amount of money than in your account) then this is referred to as 2:1 leverage. This is actually a very small level of Leverage in the Forex Market, where you can get up to 400:1 Leverage (or 0.25% Margin)!

The Futures Market is another highly Leveraged financial marketplace and I am planning on doing a series explaining the Futures Market, particularly since some Cryptocurrency traders will be interested in how it works with the Bitcoin Futures contracts being available. So keep an eye out for that coming soon!

So in conclusion of how Margin and Leverage works, the smaller the Margin in relation to the value of the assets your buying, the greater the Leverage.

The table below outlines the benefits and drawbacks to trading on Margin and Leverage:

• To learn what a Carry Trade is see this link: https://www.investopedia.com/walkthrough/forex/intermediate/level6/carry-trade.aspx

So, after taking a look at the benefits and drawbacks, should you personally be using Margin and Leverage? Well this comes down to your experience level and appetite for risk really. If you understand fully what Margin and Leverage are and you know the risks and are willing to take on more risk for more potential gain, then you can choose to trade on Margin. If, however, you have a lower risk appetite, or you just don't have a lot of experience trading/investing in financial markets then I would recommend to stay away from trading on Margin because you can end up losing more money than you even own!

That's it for this post guys, let me know whether you make use of Leverage or if you plan to in the future or not in the comments below. As always, thanks for reading and up-vote and follow and I will follow you back!

Legal Disclaimer: I am not a Professional Financial Advisor. Do your own research beyond what you read in my blog posts and make your own decisions based on the information that you collect from a wide variety of sources.