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In trading and finance, margin is the money that a trader takes as loan through a broker so as to trade a financial instrument like stocks or even currencies. It enables one to act as the master of a bigger position at a lesser capital amount. A knowledge of the working of margin is something anybody dealing with the financial markets must understand.
Learning more about margin
What is the margin?
Margin is what is basically a loan offered by your broker so that you can manage a bigger position as compared to the capital you have. Simply stated, it gives you the ability to take out loans and buy more than you would using your own money. It is the variance between the total value of your investment and the amount you will borrow with your broker. Margins enable traders to increase their possible gains, however, there are higher losses that can be experienced. Learning to know margin is a very important lesson to control your risk of investment.
How to calculate margin
The margin is calculated through the quotient anticipated money to be invested divided by the margin amount as established by your broker. Take the case of an investor who wants to purchase a 10,000 unit of stock which requires a 10% margin with your broker to place the order, you would need 1000 to make the purchase.
It can be calculated in the following way:
Margin = Margin Requirement x the value of Total Investment.
Example: A 20 percent margin requirement would require 1000 dollars of margin in order to buy 5000 worth of shares.
It is the simple formula that will dictate how much margin you would be required to enter a trade.
How to use margin in trading
Trading margin can either increase profits as well as losses. With knowledge on what is margin (มาร์จิ้น คืออะไร), traders are able to purchase extra shares, currency, or other financial instruments than they would otherwise purchase at a greater price. The following is how to utilize the finding with regards to margin in trading:
- Increase trade size: By enabling you to purchase on margin, you are in charge of a bigger trade.
- Leverage profits: You can make more profits than when you invested solely your money, in case of excellence of the trade.
- Margin calls: When your trade is against you, you may be required to increase the amount of money to be put in to save yourself.
Important things to know about margin
These are some of the important things that you have to be aware before you begin using margin:
- Margin can amplify losses: Margin as much increases your losses as it increases your profits.
- Margin calls: Brokers may demand extra funds when your equity becomes less than a specified amount of money.
- Interest on borrowed funds: You are likely to pay interest on the amount you have borrowed to trade.
- Risk management: Always value margin in order to handle your risk.
Precautions for using margin
In taking margin, one is supposed to exercise some precautions so that he is not going to lose more than he can afford. The following are the precautions to take into account:
- Use stop loss orders: These are used to reduce your possible loss by automatically selling your position at a fixed price.
- Know your risk tolerance: Do not over leverage. Borrow to the extent that you can do without it.
- Monitor your positions regularly: Pay attention to changes in the market in order to prevent margin calls.
- Have a clear exit strategy: The time to get out of your trades so as to gain a profit and loss to the minimum.
Conclusion
Margin is a strong finance and trading tool as you can use your investments to leverage and maximize your returns. It however comes with its own risks particularly when not applied accordingly. Always remember to compute your margin requirements, apply stop loss orders and get to know the risks of trading on margin before you get on the margin.
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