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How to Do Margin Trading » Increase your Leverage 2019

Can margin trading boost your profits?

When you want to purchase a certain number of stocks but you lack the full amount of money required, you can complete the execution through margin trading. Imagine you have found the perfect opportunity to make a profit on the markets. Rather than missing out on a potential win, you can purchase a certain proportion of shares yourself, while the rest are funded by the broker.

  • Margin trading is a facility offered to investors
  • A trader can use margin trading to increase their leverage
  • The rewards and risks are both high
  • The broker will charge interest on the capital you borrow
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How does margin trading work?

When you are trading on a margin, you are investing with money that has been borrowed from a bank by your broker. They have established a loan with their bank to fund this facility and negotiated a very beneficial rate of interest. They will lend to you at a slightly higher rate of interest, but on the plus side, you have the cash you need to get the securities or stocks you like the look of. The type of relationship you have with your broker will determine the percentage of funding they are willing to provide, but it generally varies between 50% and 90%. Once you take the plunge, the assets in your margin trading account and your general trading account are held on to as a guarantee that the debt will be repaid. Whether your trades go well or badly, you will be expected to honour your debt, and payment plans are not always available. When you think about what can go wrong, margin trading can feel like a bit of a gamble. Indeed, many people consider this strategy to be especially high risk, though the rewards are sizable if things go well. There are dangers involved, but you can minimise the risks by understanding exactly what you are doing before setting up a margin trade.

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Getting started with margin trading

So just how does margin trading work? Margin trading is taking a loan from a brokerage to buy more stock than you can afford. To get started, most brokerages will ask you to open a special margin account. This is different from a normal cash account where you use the balance to trade. There may also be a separate agreement, which you will be asked to sign, and your minimum initial investment for this account is likely to be around £2,000, though this varies between brokerages. This deposit is what the broker will refer to as a minimum margin. Once the account is running, you can borrow around 50% of the purchase price of an asset, often referred to as an initial margin. In the beginning, it is rare for a trader to borrow the full 50%, because they are risking lots of money. Instead, it makes sense to go for lower amounts, such as 15% or 25%, until you gain more confidence. In most cases, the loan has no end date, but it is essential to always comply with the broker’s regulations. Primarily, you will need to give the broker any proceeds from sales of stock while you still owe them. The second condition of an extended loan is known as a maintenance margin and can be harder to meet. This obliges you to keep an agreed minimum balance – if you cannot, you may receive a margin call and be forced to sell some of your assets.

Top 3 Stock Broker Comparison

1
of 10 Stock Broker eToro
National fees £0.00
Custody fee £0.00
Intl. fees £0.00
Dep. Protection £50.000
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
2
of 10 Stock Broker Interactive Investor
National fees £7.99
Custody fee £9.99 monthly
Intl. fees £7.99
Dep. Protection 50.000 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 10 Stock Broker IG Stock
National fees £ 8,00
Custody fee £ 8,00
Intl. fees 10 EUR
Dep. Protection 50,000 GBP
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74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

When your money runs out – the margin call

A margin call is one of the worst things that anyone who speculates on the markets ever has to endure. To a certain extent, if you have done your homework and lowered your level of risk, they can be prevented, but there are no guarantees when it comes to the markets. Even if you have been fully compliant with every guideline presented by your brokerage, you may be issued with a margin call because an aspect of their lending plan has been amended. Once this new policy comes into effect, investors who previously enjoyed a great relationship with the broker may be thought of as a risk. This can be as a result of market forces and the types of security you own, or any number of other factors.  It seems unjust to many traders, but no broker is willing to take responsibility for borrowed funds that cannot be repaid, so they tend to err on the side of caution. In practical terms, this means that they try to establish a larger equity cushion to safeguard their company and its interests should any financial difficulties become apparent. The brokerage lends you money, so it is up to them to decide the terms and conditions of your loan. Should you choose to open a margin trading account, you may be asked to repay any money you borrow with very little notice, and you are bound by law to meet their demands for repayment.

etf 2

If a margin call is not met, what happens next?

Once you understand the basics of how to do margin trading, you must also take the time to study the full extent of the risks involved. Margin calls are legally enforceable in a range of different ways, starting with the brokerage asking you to make an additional deposit. Next, they could begin selling off parts of your portfolio in order to increase the level of equity on your trading account. They can continue to do this until you exceed their predetermined maintenance margin. Worse still, depending on the rules of your particular margin account, they may not have to inform you prior to making the sales. Your carefully curated portfolio can continue to be stripped away, and you won’t even be consulted about which shares are sold. Unsurprisingly, this can lead you even further into debt, but because you signed on the dotted line when opening an account, you have little choice. Therefore, if you feel that your trading strategies could be improved by leveraged funds, you should always carefully read a brokerage’s terms and conditions beforehand. The agreement you are presented with before starting to invest will explain exactly what is expected of you in relation to repayments. It will also provide details on the interest you will be charged, and explain more about the way that a broker will treat your securities if you default.

Margin trading for dummies – Here’s some examples

To provide a very general example of how to do margin trading, we could say that you have put away a total of £2,500 and this is all you are prepared to invest in the markets. When the conditions are right according to your strategy, you decide to take a chance and purchase shares in Company A, at a cost of £5 for each share. If you have a cash-only account, then you would be limited by the funds it holds, leaving you with the ability to buy a maximum of 500 shares in Company A. Assuming that you accurately predicted the performance of these stocks and they rise by £10, you stand to make an impressive £5,000. This is a total gain of 200% on your initial investment. With a margin trade using borrowed money, it may be possible to purchase double the number of shares. For example, a £2,500 investment becomes a £5,000 investment, and then a move to £10 in price leads to a profit of £10,000 instead. In a similar way, if the price movement happened to be downward, your losses would also be increased by half again. This is why experienced traders watch their portfolio constantly when using leveraged funds.

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The benefits of margin trading

The most advantageous aspect of knowing how does margin trading work is the leverage that it provides. Leveraged trades are not always necessary, but they can make things far more interesting. In the same way as you might borrow money to buy a car, you can borrow money to make more expensive investments. This means that your success is magnified with each stock price increase, so when you pick a winning execution, you can see a vast rise in profits. When you have a 50% boost in purchasing power, you can go ahead and buy twice as much stock as your personal funds allow. This simple equation demonstrates how leverage allows you to radically amplify your account balance, in comparison with using your own cash. Also, if you are in the middle of a cash flow problem and you don’t want to miss out on an opportunity, the leveraged funds are on hand to help out. Moreover, when you buy on margin, there is more choice when it comes to investing. The majority of cash-only accounts allow you to buy stocks and experiment with a few different strategies, but margin capabilities open up the opportunity to practice more diverse tactics, such as short-selling. With the additional cash, you can also begin to build up a more diverse collection of assets. If you have always wanted to test your skills in a range of alternative sectors, you can use a margin account to do just that.

1
of 29 Forex Broker Pepperstone
Currency pairs 70 Currencies
Max. Lever 1:30
Trading size Mini-Lot
Minimum deposit £ 200
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Risk warning: Capital can be lost. Terms and conditions apply.
2
of 29 Forex Broker GMO Trading
Currency pairs 60 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit $ 250
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Risk warning: Capital can be lost. Terms and conditions apply.
3
of 29 Forex Broker XM
Currency pairs 55 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit $ 5
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Risk warning: Capital can be lost. Terms and conditions apply.
4
of 29 Forex Broker ITRADER.com
Currency pairs 50 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit £ 250
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Risk warning: Capital can be lost. Terms and conditions apply.
5
of 29 Forex Broker ETFinance
Currency pairs Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit £ 250
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Risk warning: Capital can be lost. Terms and conditions apply.
1
of 6 ETF Broker IG
ETFs w/ discount 1200
Custody fee 0 GBP
Min. deposit £ 0
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74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

2
of 6 ETF Broker Fidelity
ETFs w/ discount 93
Custody fee 0 GBP
Min. deposit £ 2.500
Trading from 25 GBP
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Risk warning: Capital can be lost. Terms and conditions apply.
3
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ETFs w/ discount
Custody fee 0 GBP
Min. deposit £ 0.00
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Risk warning: Capital can be lost. Terms and conditions apply.
4
of 6 ETF Broker Bestinvest
ETFs w/ discount 216
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5
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ETFs w/ discount 740
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Risk warning: Capital can be lost. Terms and conditions apply.
1
of 10 Stock Broker eToro
National fees £0.00
Custody fee £0.00
Intl. fees £0.00
Dep. Protection £50.000
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Risk warning: Capital can be lost. Terms and conditions apply.
2
of 10 Stock Broker Interactive Investor
National fees £7.99
Custody fee £9.99 monthly
Intl. fees £7.99
Dep. Protection 50.000 GBP
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Risk warning: Capital can be lost. Terms and conditions apply.
3
of 10 Stock Broker IG Stock
National fees £ 8,00
Custody fee £ 8,00
Intl. fees 10 EUR
Dep. Protection 50,000 GBP
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74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

4
of 10 Stock Broker Calamatta Cuschieri
National fees £ 7.50
Custody fee £ 0.00
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Dep. Protection 100.000€
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Risk warning: Capital can be lost. Terms and conditions apply.
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of 10 Stock Broker Hargreaves Lansdown
National fees 11,95 £
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1
of 29 CFD Broker Pepperstone
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Risk warning: Capital can be lost. Terms and conditions apply.
2
of 29 CFD Broker GMO Trading
FTSE spread 1 Point
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Risk warning: Capital can be lost. Terms and conditions apply.
3
of 29 CFD Broker XM
FTSE spread 1.0 Point
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Max. Lever 1:30
Min. deposit $ 5
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Risk warning: Capital can be lost. Terms and conditions apply.
4
of 29 CFD Broker ITRADER
FTSE spread 1 Point
Dep. Protection € 20.000
Max. Lever 1:30
Min. deposit £ 250
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Risk warning: Capital can be lost. Terms and conditions apply.
5
of 29 CFD Broker ETFinance
FTSE spread 1 Point
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Max. Lever 1:30
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Risk warning: Capital can be lost. Terms and conditions apply.
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of 18 Crypto Broker GMO Trading
Crypto currencies 33
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of 18 Crypto Broker IQ Option
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of 18 Crypto Broker ITRADER
Crypto currencies 33
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5
of 18 Crypto Broker ETFinance
Crypto currencies 5
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Risk warning: Capital can be lost. Terms and conditions apply.
1
of 7 Social Trading Broker eToro
Underlying assets 866
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of 7 Social Trading Broker ZuluTrade
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Risk warning: Capital can be lost. Terms and conditions apply.
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of 7 Social Trading Broker Tradeo
Underlying assets 122
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of 7 Social Trading Broker FXTM
Underlying assets 247
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Risk warning: Capital can be lost. Terms and conditions apply.
1
of 9 Spread Betting Broker City Index
FTSE spread 1 Point
Dep. Protection 50000
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of 9 Spread Betting Broker FX Pro
FTSE spread 1.5 Points
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of 9 Spread Betting Broker IG
FTSE spread 1 Point
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74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

4
of 9 Spread Betting Broker Core Spreads
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of 9 Spread Betting Broker OANDA
FTSE spread 1 Point
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Risk warning: Capital can be lost. Terms and conditions apply.

The risks to consider

Wherever you choose to invest, there is a range of risks that you should take into consideration before using leverage funds. A broker comparison would illustrate that all margin accounts pose a risk, in that the investor could lose even more money than they would do with a cash-only account. Margin trading for dummies – it does not suit the style of everyone who speculates on the markets, and this is why brokerages draw up special agreements before agreeing to the facility. One of the main risks is that the stocks you buy will not perform as you hoped. When your margin trading assets decline in value, you stand to lose far more than you usually would, maybe even more than you first invested. Your losses are elevated because you not only lose what you paid in as an initial deposit but also the margin loan and on top of that the interest charged. Even if everything goes to plan and you find yourself in profit, you still have to pay off the interest – and bear in mind that it is set at a higher rate than the market average. Additionally, with a cash account, losses are a minor setback, but any loss on margin trades can trigger a margin call from the broker in order to keep your equity levels up.

Conclusion:

Conclusion – stay vigilant when buying on margin

For better or for worse, the use of margin trading exaggerates the way your portfolio performs. Both your gains and losses can be far greater than they would be if you chose a cash-only strategy. If you plan to find out more about how to do margin trading, it is vital to invest your time as well as your funds. The best stage to start out is during an up market when there is a trend towards buoyancy, and always impose rigorous loss limits on your activities. As any experienced investor knows, the market can move fast, and when prices start to fall, your debts will quickly multiply. You will need to watch your portfolio on a daily basis and be ready to respond. The risks involved can put off some people, but when you pick a winner, the rewards are significant. Margin trading is not the right tactic for newer investors looking to purchase more shares, but if you are a long-term investor looking to scale up your currently effective strategy, it could certainly make a difference to your returns.

Stocks Highlights