Thanks to the use of the basic principles of margin trading, it has become possible to work on the Forex currency market, as well as in the field of securities and commodity exchanges. However, not all beginners in the world of finance can immediately figure out what margin is. Sometimes even experienced traders can get confused. For example, no one should forget that margin trading in the securities market requires a pledge.
The main confusion is due to the fact that the concept of “margin” as a profit exists in the economy. In other words, the ratio between the value of the goods and the price at which they are sold. However, this type of margin is different from the concept that is used in the Forex market.
Difference in concepts
The general economic definition of margin can be misleading. This leads to the fact that many begin to confuse it with a mark-up, considering it one and the same. However, the difference between them is quite large, and it is necessary to distinguish between these two concepts for a successful existence in the financial market. Extra charge makes it possible to determine the level of profit, which is obtained from the difference between the cost of goods and its selling price. The margin depends on many factors, including the competitiveness of the product, market conditions, etc. It can sometimes be more than 100%.
Margin is an indicator of the profitability of the enterprise, which is calculated as a result of the sale of goods after deducting all costs of implementation. Obviously, the margin can never be more than 100%.
The concept of "margin" on the trading floors
When it comes to financial currency markets, it is necessary to take into account the specifics of the concept of "margin" in the "Forex" sphere. It is in this case that the specifics of the activities of modern financial markets are fully disclosed. The concept of margin explains the essence of the functioning of the scheme from the client through a broker to the world market. A similar scheme appeared and gained distribution precisely thanks to the emergence of margin trading in the securities market, and then on the "Forex".
Margin Trading Ideas
Having understood the difference between the basic concepts, we can move on to the basic components of the global economy. To do this, you need to consider the very concept of margin trading and figure out why it is needed. In the case of financial markets, margin refers to the amount of money that is provided to a market participant as a loan. Such a loan is issued by an intermediary, dealing center or broker. In this case, we can talk about margin lending, thanks to which a trader, as the simplest participant in the financial market, can use large amounts of money. Moreover, he is obliged to leave guarantees in the form of a pledge of personal funds.
Equity is not always cash. It all depends on the direction of activity. If we are talking about the Forex market or about margin trading on Poloniex, then trading is conducted only in currency, and the intermediary will accept a pledge from the trader exclusively in the form of this liquid product. Moreover, all processes occur on the territory of Russia in ruble, dollar and eurocurrencies.
In the case of, for example, the stock market, margin trading is based on securities and, accordingly, only this type of goods can act as collateral.
Thus, such activities can be conducted not only on the basis of the trader’s own funds, but also with credit funds provided by the broker as a loan.
Margin trading in securities can be carried out with the help of an investor who takes them as a pledge, sells, and then buys the same number of shares.
Features
Margin operations in financial markets are often called leverage trading (the ratio of the collateral amount and the credit margin allocated for it). What does this mean? There are several varieties of such margin, the most elementary of which is buying at a low price and selling at an overvalued cost. A similar scheme is called "long", which translates as "long" or "long". Many traders use the concepts of "long position", "long campaign", etc. in relation to their work.
Long received the name due to the fact that the market is constantly showing growth in the long term. The fact that this trend will continue for a long time is indicated by a number of factors, which traders and other participants in the financial market are guided by. Thus, betting on the long term in the hope that assets will increase, traders trade "in the long". This type is the basis for other methods of conducting marginal operations.
The risks
Quite often, dealing centers warn their clients against using margin trading, as it is quite easy to play too much and lose big debts. Let's see what this is connected with.
Working in financial markets such as Forex always involves the risk of closing certain transactions with a certain loss. Such a situation is almost inevitable, as many large traders use the slightest market movements, whether it is Forex or any other, in their interests. Thus, the main goal of the participant is to make the margin work for him, so that the total percentage of profit covers possible losses.
Underwater rocks
It should be borne in mind that after the loss of funds, it will be necessary to earn more as a percentage. This is required to recover damages. Thus, having lost 20% from one hundred thousand, it is necessary to earn at least 25% in order to compensate for the damage suffered. But operations will have to be with 80 thousand.
If losses amounted to 50%, then, trading with 50 thousand, you will need to work out for a profit of 100%, just to make up for what was lost. It turns out that the more a trader loses, the more difficult it is to return everything to its previous balance. It is very important to consider factors that show the effectiveness of the current financial policy. There is a certain safety zone - a kind of level below which it is dangerous to fall, since further losses will be critical.
It’s more difficult for beginners
If a novice trader understands all the basic concepts and understands the principles of working in the financial market, however, having started practical trading, has allowed a drawdown of more than 15%, then the strategy for conducting operations should be reviewed. Otherwise, in the future this will lead to even greater losses.
Quite often, traders make losses below the safety zone. Not realizing that at this stage it is better to stop and change the strategy of margin trading, traders allow too much drawdown and eventually completely drain the deposit.
Paradoxes
The main paradox is that leverage significantly reduces the potential risks of margin trading. At first glance, this statement is absurd. However, practice shows that for an experienced trader or broker, margin is an indispensably useful and valuable trading tool. In this case, it is worth considering the nuance. It should be noted that margin trading on the exchange with a “shoulder” will be possible after replenishment of the deposit.
Imagine that the account of the trader is 10 thousand rubles. The calendar year contains approximately 250 days in which trading is conducted. For about 50 days, the trader needs to rest so that intellectual work does not reduce concentration and clarity of thinking. Thus, 200 working days per year remain.
The main unspoken rule of all experienced traders is that you should not try to earn big money at once.It’s better and more correct to learn to show even the modest, but stable and regular result of one’s activity. 0.5 percent per day will be quite enough, and taking into account fluctuations in securities, for example, Sberbank is 3% per day, this will not become a big problem. With Sberbank, margin trading will not immediately yield a huge result, but will allow it to gain a foothold in the market.
Cold mind
In this case, quite often emotions win common sense. Composure is the main quality of a successful trader. However, not everyone succeeds in learning to control their emotions. As a result, a novice trader begins to perceive small profits as something that is not worth all his efforts. In fact, the standard thirst for quick profit comes into play, which is destructive for the trader.
But after making simple calculations, you can understand that by earning 0.5% per day and not removing the profit, you can get up to 171.15% per year. That is, 10 thousand rubles, even on the basis of basic knowledge of the financial market and without the use of sophisticated strategies, you can increase up to 27 thousand ... Not a single bank gives such interest on deposits.
Risk reduction
Having studied the processes of movement of funds in the foreign exchange markets, one can also ask how to use margin to minimize the risks of margin trading in stocks on Forex. Consider an example. By purchasing a share, the price of which is 90 rubles, you can earn 0.5%. The main thing is to catch the price movement of 45 cents. From this moment, regardless of the number of shares available, the trader will have the opportunity to earn his 45 kopecks from each of them.
The marginal leverage will allow you to purchase a lot more securities. Even in a 1 to 1 ratio, you can buy twice as many stocks. And here the issue of greed is gaining relevance again. Having acquired a larger number of shares, a trader can try to get a greater amount of profit and earn not 1, 5, but 1%. The most important rule is not to succumb to emotions and rush into the maelstrom of financial passions with your head, but calmly continue to earn your standard and stable 0.5% per day.
Using leverage allows you to achieve profit at half a percent, capturing market movement not in 45 kopecks, but in 23 kopecks, which, respectively, is two times easier. That is, in fact, we earn as much with margin as without margin, but with less risk.
Thus, margin is a profitable and convenient tool for safe trading in financial markets. It allows you to get a stable profit even with a small deposit of own funds. Margin trading has gained great popularity among traders since its inception. After all, it allows you to minimize risk using other people's funds. In this case, the trader risks losing only his own funds.