In the world of finance, margins play a crucial role in enabling traders to amplify their potential returns. Understanding how margins work and the implications of margin trading is essential for all traders, whether new or experienced.
Banxso, the leading online trading platform based in Cape Town, believes knowledge is key when embarking on your trading journey and understanding the intricacies along with the market activity lead to a happy trading experience for all.
Banxso recently ran the Tour de Banxso competition which saw several of its clients win prizes for successful trading. The winner, Rigardt Maartens, and now proud owner of a classic Mercedes Benz, believes that understanding margins played a pivotal part in him securing the top spot.
“One of the biggest mistakes I made before the competition was not understanding Margins and Margin Trading. I didn’t realise the margins involved and I took a position that was too big. I almost had to sell immediately. You need to ask yourself: ‘Can I afford the margin that I’ve taken if the market turns around?’. Look at this and understand this properly,” he urges.
Banxso is a Contract for Difference (CFD) trading platform. A contract for difference (CFD) is a financial contract that pays the difference in the settlement price between the opening and closing trades. CFDs allow investors to trade the direction of security price movements, usually in the short term. When it comes to margins, the required margin is the minimum amount that you'll need to have in your account to trade a contract for difference. Different asset classes will have different required margins. The margin level is a percentage that indicates the health of the account while there are trades open - a low margin level percentage means that the account is low on available funds to open more positions with.
So, taking a step back, what are Margins?
Margins refer to the amount of capital that is required to open and maintain a leveraged position in the financial markets. Essentially, margins allow traders to control a larger position with a smaller amount of capital. By utilising margins, traders can potentially increase their profits, but they also expose themselves to higher risks.
Basically, margin is the amount of money needed to open and maintain a position on the market, while leverage determines how much larger the trading size you control can be. Banxso offers a 1:200 leverage.
How do Margins work?
When a trader wants to enter a leveraged position, they are required to set aside a certain percentage of the total position size - this is known as the initial margin requirement. This initial margin acts as a security deposit and ensures that the trader can cover any potential losses. As the value of the position fluctuates, the margin level also changes, which can lead to a margin call if it falls below a certain threshold.
What are the components of Margin Trading?
Margin trading involves several key components, including:
- Leverage: The ratio of the total position size to the initial margin deposit.
- Margin call: An alert that a trader no longer has any free capital in their account they can use to open new positions with or cover losses of existing ones. It occurs when a trader's margin level falls below a specific percentage (%) level.
- Liquidation: The process of closing out a position to prevent further losses.
- Stop out: The stop out occurs when the trader's margin level falls below a specific percentage (%) level. This is a level below the Margin Call level and it results in the automatic closing ("liquidation") of some or all open positions in an attempt to bring the account's margin level above the threshold.
What are the advantages and disadvantages of Margin Trading?
The advantages:
- Increased potential returns: Margins allow traders to amplify their profits by controlling larger positions.
- Diversification: Traders can access a wider range of assets and markets with margin trading.
- Hedging: Margin trading can be used to hedge against existing positions or to speculate on market movements.
The disadvantages:
- Increased risk: Margin trading amplifies both profits and losses, leading to higher risks.
- Margin calls and stop outs: Failing to meet margin requirements can result in forced liquidation of positions.
- Costs: Margin trading often involves additional fees and interest charges.
Maartens says for those new to trading, it is essential to educate yourself. “Understand the risks and mechanics of margin trading before getting started. In addition to this, start small. Begin with a conservative approach and gradually increase your exposure to margin trading as your confidence grows. And lastly, manage your risk. Do this by setting stop-loss orders and always have a clear risk management strategy in place.”
Manuel de Andrade, COO at Banxso in Cape Town echoes Maartens' advice and says understanding the terms and how to trade is essential, from Margins through to trading patterns and trends. “At Banxso, we are committed to providing our users with the tools and resources they need to make informed trading decisions. By understanding the ins and outs of margins and margin trading, traders can enhance their trading experience and strive for success in the financial markets.”
For those new to trading or looking to expand their knowledge, Banxso provides valuable online tutorials on its website and hosts webinars which cater to novice traders eager to learn. (Visit the Banxso Academy here)
Banxso offers exposure to a diverse range of financial instruments, including cryptocurrencies, indices, stocks, commodities, and forex. For more information on Banxso and how to get started in the world of trading, please visit www.banxso.com
Banxso operates under rigorous regulatory oversight to ensure security and confidence. Authorized by the South African Financial Sector Conduct Authority (FSCA) with license number 37699, the company adheres to strict conditions, including the operation of segregated client accounts, ensuring client funds are protected from business use. Additionally, monthly reports are submitted to the FSCA and the Financial Intelligence Centre as part of their regulatory compliance.