Week 1 Journal: Margin Trading
Prior to completing your journal, read in your textbook Chapter 5, How Securities Are Traded, complete the Margin Trading discussion forum, and guide response and review all posts in the discussion forum.
Course Policies
Using another classmate’s margin transaction from the discussion board, compare the amount of your margin call given a 10 or Big Blue Button’s 20% decline to the classmate’s margin call under the same scenario.
Student Support + Explain the differences.
Week 1 Journal: Marginal Trading
Introduction
Margin trading can be defined as a transaction of an amount that exceeds the trader’s or investor’s level of funds. Investors can invest any small amount but the brokerage farm pays the remaining amount. Using leverage traders make huge profits. Without this given credit investors have to pay the whole amount.
Definition
Margin is the minimum amount that a broker holds for some time for opening positions, which is deposited by the client or the investor. Margin is a minimum deposit without this client can’t get credit or leverage. Margin trading is the performance of two transactions that are opposite. Like in the Forex market, anyone can buy foreign currency. But no one is buying because they need that currency, they just want to use the currency difference for trading. They are mostly speculators who want profits (bfi.uchicago.edu, 2020).
Example
Let’s understand with an example. Someone wants to trade in the Forex market with EURUSD and decided to create a position with a 10,000 volume. The current EURUSD price in the market is 1.0911/1.0912. This indicates that he should have approximately $ 11,000 for the required opening position. If he has $ 200 as the capital using margin trading he can open that position for 1:100 Forex leverage because he has a total of $ 20.000 in his balance in the trading account. Speculators are unrestricted in their direction so, he is free to open any position in the long term or short term. These are a few of the key features of margin trading.
The ratio between clients’ funds and the broker’s credit can be defined as leverage. Leverage has a great influence on the result of trading. In the positive case, it can multiply the profits also vice versa. One should not invest his total balance in a single account opening. If the market does not follow the investor’s prediction and goes in a different way the investor can lose his whole amount of money in just a few seconds (ifcmarkets.com, 2022).
Use of Margin Account
The investors who buy the share or securities can pay the full amount or can borrow some of the total amount. When an investor borrows capital from the broker he must open a margin account with the broker firm. A minimum of 25% of the total capital should be deposited as called margin in the margin account of the investor in the broker farm. Investors can borrow capital for a short sale if there is a chance for a price decline. Margin trading is mostly used in leveraging the profit on investment which increases the purchasing power of the investor. There are some regulations set by FINRA about margin trading. A minimum of 25 % of the total amount should be deposited in the margin account, few of the shares or securities can not be traded in on margin that should be purchased by the full amount.
Reference List
Bfi.uchicago.edu (2020). Margin trading. Retrieved from: https://bfi.uchicago.edu [Retrieved on: 20th October 2022]
Ifcmarkets.com (2022). Purchasing on Margin, Risks Involved with Trading in a Margin Account. Retrieved from: https://www.ifcmarkets.com/en/introduction/margin-trading-volumes [Retrieved on: 20th October 2022]
