Thank you for joining me on this short course introducing margin trading. Lets get started straight away, please have a watch of the video:
Margin Trading Definition
In retail derivative trading the financial instrument is likely a foreign exchange contract, CFD or spread bet. The counterparty is normally the trader’s broker. Traders do not have to supply the full notional value of a trade, instead they use the deposited sum of money to cover the risk of the trade moving against them and a debt becoming due to the broker.
Margin Trading Example
Lets show you how margin works with an everyday example….well sort of everyday. The process of margin trading creates leverage on a trader’s capital, its the same when property is purchased with a mortgage. Note the % returns.
| Property example | Before | After | Difference |
| Market value | £260,000 | £300,000 | +£40,000 (15.4%) |
| Capital | £60,000 | £100,000 | +£40,000 (66.7%) |
| Mortgage | £200,000 | £200,000 | – |
Now, if we take this concept and apply it to shares we can see how traders might find this a useful tool. In trading there are different names but the concept of leverage is the same.
| Shares example | Before | After | Difference |
| Market value = notional position | £500 | £550 | +£50 (10%) |
| Capital = margin/deposit | £50 | £100 | +£50 (100%) |
| Mortgage = broker funded | £450 | £450 | – |
Before developing this further lets sum up the main points.
- Margin trading is when the trader effectively borrows money from their broker to fund a part of their position.
- The ‘margin’ is the money that a trader places on deposit with their broker.
- Margin trading allows traders to leverage their capital.
- Margin trading carries risks that traders need to understand before trading.
If you’re happy with everything please click ‘complete’ to move on. You will be able to come back to the lesson.
