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Learning Lab: Why Trade on Margin? Pros and Cons

09.12.2022

By borrowing money from either exchange traders or the exchange itself, margin trading is an investment strategy enabling the enhancement of the amount of money you are able to trade. This method of trading gives you the chance to open a position that could ultimately be far more profitable than you could otherwise access.

 

Although margin trading may appear to be a lucrative opportunity, it entails significant risk and is typically only advised for experienced traders who are familiar with the dynamics of the crypto market and have the foresight to estimate prices accurately.

 

What is Margin Trading?

Trading assets on margin involves using money given by a third party. Margin accounts give traders greater access to funds than standard trading accounts, enabling them to leverage their transactions.

 

Margin trading essentially amplifies trading results so traders can make more money on profitable trades – the stock, commodity, and cryptocurrency markets all use margin trading.

 

 

Margin Trading Example

Let’s examine a hypothetical example. With margin trading, you can leverage your investment amount (i.e. use borrowed money to invest – 5:1, or 5x, to acquire $25,000 worth of Bitcoin for only $5,000).

 

In this case, you make a $5,000 investment and borrow the remaining $20,000 through an exchange. Therefore, since you are borrowing money, you are responsible for paying it back along with any associated fees.

 

The Pros

Gaining from leverage is the main motivation for investors to engage in margin trading. By boosting the funds available to buy assets, margin trading facilitates an increase in purchasing power. Investors can purchase more securities using their capital as collateral for loans larger than their available funds, as opposed to doing so only with the amount they have.

 

Margin trading can greatly increase profits. Again, having more securities means that value increase will have a bigger impact because you have a bigger debt investment. In the same vein, if the assets placed as collateral increase in value as well, you could be able to use leverage even more because your collateral basis has increased.

 

Margin trading typically offers greater flexibility than other types of loans. Your broker’s maintenance margin requirements could be straightforward or automatic, and there might not be a set return schedule. The loan is open for most margin accounts until the securities are sold, at which point final payments are frequently required from the borrower.

 

 

What You Need to Know

Investors should be mindful that margin trading can multiply losses as well as multiply gains.

 

You could easily owe more money to the lender than just your initial equity investment if the value of securities purchased on margin rapidly declines. In addition, brokers often charge interest expense – in other words, these fees are assessed regardless of how well or poorly your margin account is performing. At Coinmetro, you pay interest on the borrowed amount while the trade is still open, but this cost is usually small in comparison to trading profits and losses. By now, perhaps you already know – Coinmetro has some of the lowest and most transparent fees in the industry.

 

Moreover, investors may experience a margin call as per margin and equity requirements. This is a requirement from the broker to deposit additional funds into their margin account due to the decrease in equity value of securities being held. Investors must be able to provide this additional capital to satisfy a margin call.

 

Finally, a forced liquidation could take place if an investor is unable to contribute more equity or if the value of an account drops too quickly and falls below specific margin requirements. To meet the broker’s requirements, forced liquidation is applied to sell the securities bought on margin, which could cause losses.

 

Should I Trade on Margin?

Since margin trading is a financial operation, it carries risk just like any other type of trading. Margin trading is somewhat riskier than traditional trading, though. Why? Mostly due to the fact that you borrow some of the money you invest, creating an even bigger exposure than your initial amount. Additionally, the borrowed money must be returned along with any relevant fees, interest, and penalties.

 

Although knowing how the market functions and having excellent technical analysis abilities won’t eliminate all the potential hazards, they will provide you with a distinct advantage when trading on margin. Having exposure on margin may be better suited for more seasoned traders, but using our demo platform is a fantastic place to start your journey! This way you will learn the ins and outs and build confidence prior to operating with real funds. Are you using this bear market as an opportunity to learn something new and become a better trader and investor?

 

Trading on Margin with Coinmetro

With 5x leverage from Coinmetro, you can step up your trading performance and explore new financial opportunities.

 

Our platform for margin trading was developed by and for experienced traders and offers a variety of collateral choices. But it is also designed to be used in a simple and efficient way by beginners as well. Additionally, you get access to one-click transaction administration solutions.

 

Did You Know?

We recently made a few updates to our Margin Trading:

  • XCM Margin Limit Update – After successfully implementing XCM on Margin, we followed-up with XCM Margin Limit Updates, essentially unlocking more opportunities for Coinmetro users and XCM holders to level up their trading and bring more value to the Coinmetro Token.
  • XCM Margin Fees Reduced to 0 – We have activated negative fees on XCM long positions! This means while the price is moving sideways, you will not be penalized with margin fees. We understand our loyal community and XCM holders are supporting us and want to make sure we are on their side and giving back.

 

Sign In to your trading account or create one now to join the best crypto community and change the course of finance together. To stay current on the most recent developments in the crypto world, join the Coinmetro Discord and Telegram communities.