The Strategy of Online Trading Margin and the Phenomenon of Leverage for Trading
What is Margin Trading?
What would you think of me if I bought more stocks from the market than I could afford? Crazy, right? But this is exactly what Margin Trading means. It involves the buying and the sale of stocks in one go, for which a broker lends you money by keeping the stocks as the collateral. If nothing were to go wrong in a trade deal like this, margin trading helps the beneficiary to make quick money.
For instance, if the beneficiary wants to buy a stock with Rs. 50 as the market price. By margin trading, he would be taking a loan from a broker of Rs. 25 and would be off the remaining Rs. 25 from his own pocket. This is only keeping in consideration that the initial requirement of margin with the beneficiary’s lender is 50%.
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What if things go wrong?
What would happen if the prices of the stock fall from Rs. 50 to Rs. 25? If the beneficiary has completely paid for the stock, he will lose half the money. What if he applied margin trading for this deal? He will lose 100% of his money in this unfortunate scenario. Along with it, would come interest for the loan which he had taken from the lender.
Leverage in Trading
The concept of Online Trading Margin and Leveragefocuses on using a small investment to open a relatively large deal. This is done in order to optimizethe potential for profit, but it can also maximize risk. This is because when leverage rates are high, there is an amplification in successful and unsuccessful deals.
Let us understand Online Trading Margin and Leverage with the help of an example – if the budget of your investment is $10, the greatest leverage of 100:1, the deal which you can open is worth $1000.
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