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Home » Learn » 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 CFDs and spread bets, 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 trading account.

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

Manage your risk 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.

This article is not investment advice. Investors should do their own research or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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