The ins and outs of the margin
The margin is the deposit your spread trading
company needs you to put down to open a trade. Depending on what you trade, the margin can be anything from 10% to 25% of your total exposure.
With spread trading, the quoted margin will be the amount needed based on risking R1 a point.
For example, you put a trade on Company ABC and its minimum margin is R250. If you decide to trade R5 a point, you’ll need to put down an initial margin of R1,250 (R5 x R250).
The margin is the amount of money a spread trading company needs to maintain your open positions.
By trading on margin, you gain gearing
When you trade on margin, by depositing a small amount of money you gain exposure to a much larger number of shares. And this is where gearing comes in. In other words, a small price move can give you a big return.
Let’s have a look at how this works with the help of an example…
You think that shares in Company ABC are going to rise. You have two options:
You can buy the shares through a stock broker and sell them for a profit at a later date; or
You can open a long trade with a spread trading company.
If Company ABC is trading at R10 a share and you buy 1,000 shares, this would cost you R10,000 (excluding any costs) through a stock broker.
But with spread trading, you’d only pay a fraction of this amount as you’re trading on margin. If the margin requirement for Company ABC was 10%, you’d only need R1,000 to open the trade.
If you risked R10 a point and the share price rose 100c, you’d gain R1,000. That’s a 100% profit on your initial margin. If you’d invested in shares, your profit would only be 10%.
But don’t forget, this gearing effect can work against you. As well as multiplying your profits, gearing multiplies your losses.
So there you have it. How you can boost your profits by trading on margin with spread trading.
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