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Trading on margin means greater risk


Many types of online trading account offer traders with the option to trade on margin. This means a company is lending you the money to trade bigger positions in the market than you would usually be able to afford.

With contracts for difference and financial spread betting accounts, the margin is quoted as a percentage next to each market.

Margin facilities may also be available for share trading, exchange traded funds and futures and options accounts: ask your broker for more details. The degree of money you are advanced may depend on your overall credit rating.

With Contracts for Difference and spread betting, the margin percentage reflects how much of the total trade you need to deposit. Thus, £100 advanced on 10% margin would give you an initial trade size of £1000, while using 1% margin would explode to £10,000.

It is important to manage your risk carefully using stop losses when trading on margin, as sudden price moves can inflict punishing losses on your positions and lead to a margin call.

What are margin calls?

A margin call occurs following losses in the market, when your broker or spread betting company contacts you to ask you to top up your margin.

For example, if you staked £100 on a trade, and the market turned against you, your broker would contact you once your losses exceeded a certain point.

For some brokers this might be the amount of margin you initially staked, for others the margin call might depend on how much cash you had available in your account.

It is advisable to ask your broker when you open a trading account exactly what their policy is on margin calls.

Trading on margin using stop losses

One of the best ways to protect against margin calls is to set your stop loss at a price that is equivalent to the loss of your margin.

This means your trade will be closed automatically once you have lost your initial stake.

Be aware, however, of the volatility of the market you are trading: it is possible that this may lead to you being stopped out early on in some markets, in which case you will have to be prepared to set your stop further out.

It is important to remember that the higher the quoted percentage margin rate is, the higher the share of trade you need to put up yourself. Thus, a 50% margin rate would mean your trading provider would only be financing half your trade.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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