1. What is Margin Trading?

Margin trading is a way for investors to buy and sell securities by only paying a portion of the funds (or securities) to the brokerage firm, thus obtaining financing or securities lending for trading. In this type of trading, investors are required to deposit a certain amount of margin or securities as collateral for the borrowed funds used to purchase securities.

During margin trading, investors use the available marginable securities or cash in their brokerage accounts as collateral to secure the borrowed loans. Interest is calculated and collected periodically based on the amount and duration of the collateralized loans.

2. How Margin Trading Works

The amount of margin in a trade depends on the leverage ratio you choose, and there are two types of margin trading worth noting. The funds you need to open an account are the same as the required margin. It is defined by the leverage you use, expressed as a leverage ratio.

2:1 Leverage = 50% Margin

5:1 Leverage = 20% Margin

10:1 Leverage = 10% Margin

20:1 Leverage = 5% Margin

30:1 Leverage = 3.3333% Margin

Maintenance margin trading also has restrictions, which depend on your overall maintenance margin - the amount required to be paid with equity (total account value). According to regulations, the maximum leverage for retail accounts varies by asset type, ranging from 30:1 to 2:1.Brokers require you to use assets to pay margin to reduce risks. If you don't have enough funds to cover potential losses, you may be asked for additional margin. The broker will request you to add funds to your account or close your losing trades. If your trading positions continue to deteriorate, you will face margin calls.

For example, if you want to participate in gold spot trading now, the platform supports trading from one ounce, which is approximately 31.1034768 grams, at a price of around 2200 US dollars. The broker offers a leverage of 5:1, requiring a 20% margin, so you can start trading with just 440 US dollars.

 

Increasing Profit Potential Through Leverage

Margin account trading allows you to utilize leverage, which is a technical multiplier of income (or loss) that is directly proportional to the initial margin. In other words, the higher the leverage, the greater the potential profit, or loss, obtained through correct predictions while trading long or short positions. Unlike brokers or exchanges, the level of leverage is determined based on the individual circumstances of the trader. Typically, these circumstances entail the initial margin level, the volatility of the trading instrument, and the risk coefficient.

 

3. Advantages and Disadvantages of Margin Trading

Advantages:

• Increased Buying Power:

One of the most apparent benefits of margin trading is that it amplifies the investor's buying power. Margin trading allows for trading on borrowed funds, enabling investors to purchase more stocks than they typically could with a cash account.

• Higher Potential Returns:

Margin trading utilizes financial leverage, thereby amplifying the potential profit opportunities for investors.

 

Disadvantages:

• Increased Risk

Investing with borrowed money carries inherent risks. Regardless of whether the securities purchased appreciate or depreciate, investors are obligated to repay the borrowed amount.

• Interest Costs

Borrowing money comes with a cost. When using margin for investment, investors must pay corresponding interest on the borrowed amount. Before engaging in margin trading, investors should consider the associated costs - such as fixed interest expenses. Even if the stocks purchased by investors maintain their value, the cost of borrowing can lead to losses.

 

4. What are Margin Calls and Position Liquidations?

Margin calls and position liquidations are common operations in the financial markets, especially prevalent in stock and forex markets. These situations arise when the funds in a trading account (i.e., initial margin) are insufficient to maintain open positions.

Margin buying occurs when investors use their own funds and borrowed funds from brokers to trade securities. The investor's equity is calculated as the market value of securities minus the borrowed amount. When an investor's equity falls below a certain percentage requirement (known as maintenance margin), the system issues a margin call. If the investor is unable to deposit enough funds to meet the maintenance margin requirement, the broker may execute a position liquidation, selling securities in the account to cover the shortfall.

On the other hand, position liquidation is a process where brokers or exchanges automatically close a trader's positions due to a deviation beyond a certain level between the asset market price and the opening price of long or short positions. This typically occurs when a trader fails to replenish funds promptly upon receiving a margin call or cannot maintain open positions as asset prices sharply decline.

 

In summary, margin calls and position liquidations are designed to protect brokers and traders from losses. When a trader receives a margin call, prompt action is required to deposit funds and avoid position liquidation. Failure to meet this requirement results in automatic position closure, leading to potential losses for the trader. Therefore, regularly monitoring the margin level in trading accounts and timely fund replenishment to avoid margin calls and position liquidations are crucial.

 

uSMART offers the following margin trading products:

Gold and Silver

These products support both long and short positions, allowing you to buy or sell based on market trends. Orders can also be held for an extended period. uSMART ensures minimal spreads, ensuring you can obtain better prices during trading. Additionally, there are no trading commissions charged, making your trades more cost-effective. You can trade 24 hours a day, 7 days a week, and uSMART provides a maximum leverage of up to 5 times.

To trade these margin products, simply log into the uSMART SG APP. Click on "Discover" at the bottom of the page, then navigate to the "Commodities" section where you'll find the "Bullion" category. Click on "XAU/USD" or "XAG/USD" to start trading.

This diagram is provided for illustrative purposes exclusively

 

FX

Foreign Exchange Contracts for Difference (FX CFDs) are a supplementary way to trade forex currency pairs, allowing you to profit from predicting the price movements of currency pairs without actually owning the specific currency. It supports both long and short positions, offers high liquidity, and currently supports trading with leverage of up to 20 times.

To trade Forex CFDs, log into the uSMART SG APP. Click on "Discover" at the bottom of the page, then navigate to the "FX" section where you'll find the "Major Currency" category. Click to view detailed trading information.

This diagram is provided for illustrative purposes exclusively

 

 

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We have based this article on our internal research and information available to the public from sources we believe to be reliable. While we have taken all reasonable care in preparing this article, we do not represent the information contained in this article is accurate or complete and we accept no responsibility for errors of fact or for any opinion expressed in this article. Opinions, projections and estimates reflect our assessments as of the article date and are subject to change. We have no obligation to notify you or anyone of any such change. You must make your own independent judgment with respect to any matter contained in this article. Neither we or our respective directors, officers or employees will be responsible for any losses or damages which any person may suffer or incur as a result of relying upon anything stated or omitted from this article.

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