The Enormous Benefits of Margin Trading

Discussion in 'General Forex Discussion' started by priyana, Jan 16, 2019.

  1. priyana

    priyana Member

    Forex trading is often likened to gambling, and for good reason. People here are always trying their best to extract maximum profit from the market, and resorting to whatever means are necessary to achieve a gain. Be it investing in high-risk shares or engaging in margin trading, there’s nothing that people won’t do. What exactly is meant by “margin trading”, and how exactly would it help?
    Another word for margin trading is ‘trading on leverage’. When the companies take loans to invest in various projects, the stock and share investors are also able to borrow money and reap up glorious profits. Explained in more casual terms, trading on margin or leveraging your cash in stock investment is when you borrow money from your brokerage and invest it in shares. And thereby increase your chances of profit.

    Let us illustrate the working of this mechanism: Suppose you have an initial trade margin of 75%. That would enable you to buy thrice the amount of stock than you would’ve been able to, otherwise. Of course, that is not to say that it does not have its downsides; it is a double-edged sword like most of the financial tools. If trading on margin can magnify your profit, then it could also do it to your loss; it is not always possible to be constantly on the winning side. It is also not probable that you’re always going to be able to pick up the winning stocks. Though it goes without saying that taking the risk does provide give you a chance to really make a huge profitable.

    We can imagine a hypothetical scenario where a trader can end up with a sea of surplus return: Say one buys security worth $20,000, $10,000 of which is paid from the margin account and the rest $10,000 is from the deposit of regular cash. A particular company is trading at $100 and it is being speculated that the stock value will experience a huge upward jump. Normally, one would be capable of purchasing about 100 shares. But if you invest and use leverage for that purpose, then you're investing on margin. This means, that you would be able to buy a total of 200 shares.

    Afterwards, the company whose shares you bought experiences a huge windfall in terms of gain prices that year, and subsequently the price of shares goes up by 30%. The investment you made is now worth $25,000 (200 shares x $125) and you are able to lock in the amount of profit. After you have paid back your broker the $10,000 that was borrowed by you, you would be left with $15,000, $5,000 of which is the profit you earn. That's a 50% return even though the stock only increased by 30%.
     

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