Different Forms of Trading - The Benefits and Drawbacks in the Financial Market - Part 2
Margin trading is one of the forms of trading that is common in the financial market. It is a bit more advanced than the basic spot trading and more popular for advanced traders. Advance trader love to take advantage of opportunities and margin trading gives traders the chance to take advantage of opportunities and make huge profits without the need to have much capital. Margin trading is basically a form of trading that involves a trader borrowing funds from an exchange to buy a cryptocurrency asset that is worth more than their initial capital.
Simply involves borrowing funds from the exchange, and then using that funds to buy another cryptocurrency that has more worth than what their initial capital could buy. For instance, a margin trader who has $200 in capital but wants to buy a asset worth of $500. The trader would take a loan from an exchange, the trader would use the borrowed asset to buy the asset while using the capital as collateral, after the trader have sold for profit, the trader would repay back loan at a later date.
As always, margin trading comes with benefits and drawbacks. Some of the benefits of margin trading are; Firstly, it gives traders the ability to purchase coins that is more than their capital. Secondly, traders have the chance to make huge profits from small capital. Thirdly, traders can buy low and sell high at any time without any restrictions. Fourthly, Traders can borrow assets at any time. Lastly, margin traders have the freedom for diversification by having multiple positions opened for the different assets
As margin trading has its benefits, it also has its drawbacks. Some of the drawbacks of margin trading are; Firstly, the risk level is very high. Secondly, margin traders can lose all their capital when the trade goes against their prediction. Thirdly, it is mostly available for only advanced traders. Fourthly, not everyone can become a margin trader as there are requirements. Lastly, it is a bit more complicated for beginners and requires more steps than the regular spot trading.