Margin Trading, How Does it Works? Guide + Risks Involved

Margin trading involves using funds from a third party to trade assets. In a successful trade, a huge capital will result in hefty profits. In most cases, traders lack large sums of money to conduct a significant trade.

In such scenarios, having a margin account comes in handy.

You are able to get a ‘loan’ from a broker and trade with substantial funds. The lender uses the assets in your trading account as collateral for the offered funds. The concept is somewhat similar to purchasing a house via a mortgage.

This practice is applicable in Forex, cryptocurrency, commodity, or stock markets.

When to Use Margin Trading

As part of being a disciplined trader, you should use margin trading moderately and only utilize it when necessary. Don’t forget that the margin is a loan that you have to repay with interest!

When engaging in margin trading, you are hoping that your returns will be higher than the amount you need to pay the broker. If the earnings are lower, you will have to reimburse the lender through the amount in your trading account or your own pocket.

Only use this strategy when you have effective risk management tactics and a practical trading strategy. Whether the market is extremely volatile or not, failing to use a low or moderate risk strategy will result in you experiencing the ‘wrath’ of margin trading.