Margin vs Leverage and the Key Differences in Trading
There are several methods of trading and leverage trading happens to be one of them.
You see, many traders anticipate that when trading, the chances to gain higher returns will come from investments that require more capital than they possess. This is where the concept of borrowing funds to trade comes to the fore.
These traders look to their stockbroker to borrow additional capital so that they may invest in the security they had been eyeing.
Now, since the broker also needs some assurance that the money borrowed will be paid back with interest, the trader will invest a sum amount and possible collateral to satisfy the trader.
This sum amount plus the capital is known as the margin, and the whole process is called leveraging or leverage trading.
With the help of the margin, traders can generate high leverage which could lead to either higher gains or higher losses.
We know the two concepts can seem overlapping, however, it is important to know how to distinguish between the two, particularly if you are looking forward to stepping foot into the world of MTF trading.
Understanding Margin
Think of the margin amount in MTF trading as the difference between the total that the trader has put in the margin account or the total value of securities kept in it and the value of the loan that the trader has requested from the broker. With the help of MTF trading, traders can also use their assets to secure a loan from their stockbroker.
To secure the loan via the MTF trading method, traders first need to open a margin trading account with the stockbroker they want to borrow the amount from. The trader then has to deposit a small initial investment into this account which will act as the leverage. This initial amount is called the minimum margin.
This amount needs to be maintained throughout the time of the trade. However, if the amount ever falls below its maintenance level, traders will receive a call from their stockbroker to add more funds to their account or pay back the loan amount by liquidating their assets. This call is called the margin call.
Understanding Leverage
Leverage trading is a method of trading that involves borrowing money to help invest in an opportunity and increase the possibility of producing higher returns.
A leverage trade can be considered as the ratio between the amount that the trader has invested and the money they are allowed to use to carry out trades after taking out the loan.
With leverage trading, even though the return percentage is high, the loss percentage is equally high. So if the trade goes in the opposite direction of the trader, the loss potential could be huge.
Difference Between Leverage and Margin
To help you understand the difference between margin and leverage, here is a comprehensive list:
Conclusion
MTF trading and leverage trading can seem overlapping or confusing at times.
However, it is extremely important to understand the difference between the two so that you can make informed investment decisions and take advantage of the numerous traders offering the lowest mtf interest rates.