In the financial world, margin is a very frequent tool used to increase profits. A lot of investors want to “play Margin”, but did you know that playing Margin in stocks and playing Margin in Forex are two different concepts?
Margin play also has many other ways of calling such as: margin trading, trading with leverage, playing margin… In it, you can use small amounts of money, create appropriate leverage, buy assets larger than you have.
What is margin? What are the pros and cons of margin and what notes to take when starting with the Margin path? Let’s find the answer through the following article.
I. What is margin?
Financial leverage – also known as Margin is capable of bringing huge profits to investors, but only applies when the market as well as stocks enter the bullish wave and should only be used quickly in each period. However, not everyone knows how to use this tool effectively and avoid risks.
Margin is a form of margin trading, also known as trading that uses financial leverage, which helps traders expand the trading volume for investment activities that take place in financial markets.
For the stock market, margin can be called the fact that you borrow more money from the exchange to raise the trading level and mortgage the trading level with the same amount of stock that you buy. For the crypto market, margin is about borrowing more money from the exchange to raise the level of transactions and mortgages with the token you buy.
II. Advantages – Disadvantages of Margin
Margin is a form of trading with many advantages but if not understood, the advantages will also become disadvantages of this trading method.
The most striking advantage of margin trading is that you can make a higher profit than not using margin.
For example, let’s say you have an account balance of $10,000 and don’t trade margin, using that capital to buy BTC at $10,000 and sell at $10,100. With a trading volume of $10,000, the profit from trading will now be $100 or a 1% interest.
If you use that $10,000 to make a 1:50 margin (x50 leverage), you’ll raise your trading value to $50,000, then you sell BTC at $10,100, then you’ll make a profit of $5,000, so you’ll make a 50% profit.
Thus, if you use leverage that the price rises or falls in the right direction of trading, you will increase the profitability achieved. With Margin x5, the profit will be 5 times the normal, x1o, the profit will be 10 times higher than normal.
The downside of using margin is its high risk. Obviously, in all financial investments, there will definitely be risks. However, that level of risk becomes greater if you choose to trade margin. This level of risk I will describe by the same example as above.
For example, along with the amount above, you start trading for $10,000 and you don’t use margin. You sell at a BTC price of $9,900, at which point your loss is only $100 or 1% of the total account. This loss won’t be too big and you still have a lot of capital to try again. But if you make a trade with a margin of 1:50 (leverage x50), such a 100-price loss, you will lose $5,000 or 50% of the capital.
In the first example, you only lose $100 or 1%. You can make similar loss-making trades 99 times more than you burn your account. But when you use margin (1:50), then another such trade and your account will fly away.
Thus, when using margin in trading, the risk level when losing will multiply more than the normal loss. If the leverage x5, the loss will be 5 times the normal, x10, the loss will be 10 times.
III. The big difference between investing in margin and not using margin
When using margin, investors choose the right stock, it will increase profits quickly, which is the effect of margin. In the event that the investor’s stock price falls, you will see the following big difference:
If the stock price falls, it will lead to margin calls, most investors do not have more money to pay, and will have to sell the stock. Thus, when the stock price rises back to the old price, because the investor does not own enough shares as originally, the net asset value does not return to the original value. If margin is not used, the falling share price will not be called by margin, the amount of stock remains the same, when the price rises back to the original purchase price, the investment capital will return to its original value.
– If the stock price drops very sharply, leading to the account fire, i.e. the investor has lost all the assets in the account, so there will be no chance of removing the original capital when the stock price rises again. If you do not use margin, how much the share price will fall, then the number of shares held remains the same, when the stock rises again, the net asset will increase.
IV. How to use margin effectively and avoid risks?
To use margin effectively, investors need to note some of the following basic steps:
- Step 1: Stock selection
- Criterion 1: to select stocks for this strategy is liquidity. Of course, high liquidity is convenient in closing margin status to a safe level.
- Criterion 2: Stocks must have a good intrinsic fundamentals as this group is usually granted a high margin ratio.
- Criterion 3: Stocks that are in a growth period or those that lead the market.
- Step 2: Make a trade
First, the investor uses his or her own capital to buy shares, after the T+3 row on the account and the share price increases from the original purchase price (the portfolio is profitable). At that time, investors observe the stock and start using margin to buy more when the stock rises as intended to increase profits. The most important thing is to buy at the right rhythm that starts to rise, absolutely do not buy when the price has risen too much compared to the foundation of that stock price.
Often, to support these buying and selling decisions investors often rely on indicators in technical analysis to make decisions. If the stock price falls, sell your initial portfolio to close margin status. If the share price continues to rise, the net asset value of the investor increases, so securities companies will provide additional limits to customers and continue to use margin to buy.
You can now buy into other underlying stocks in your portfolio without raising the price. After the market or stock shows signs of reversal, the Margin portfolio is close to the call threshold or the account is the time when investors under this strategy take profit to bring margin to a safe threshold.
- Step 3: Handle margin effectively and avoid risks
Absolutely do not use margin to bottom out, do not use margin when the market or stock is sideways and absolutely do not use margin to buy and chase stocks when the code has risen too much. All of these signals need to use technical and experiential analysis to recognize.
Absolutely must adhere to the safety discipline that is the top, so do not let greed overwhelm when the stock has passed the peak without profit down margin and do not use margin to bottom when the stock has not finished bottoming. Margin is only used for short-term investment strategies and only activates margin when it sees the stock entering the bullish channel in a favorable stock market context.
In short, the use of margin will help increase profits quickly when the stock rises. But on the contrary, it also makes the investor’s assets lose faster when the stock falls, it is like a double-edged sword, if not used will be the fastest way to “burn” the “burn” account. Investors with a lot of experience consider using margin and only use margin in favorable market times.
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