Understanding Margin Lending

Margin lending implies providing traders with the ability of controlling bigger positions than the balance in their trading account. It is tantamount to lending money without collateral and traders have to pay some interest if positions are carried overnight. Margin lending is common tool in forex trading and CFD trading. Both systems are based on spread betting and owe their popularity to the leveraged trading, commonly known as margin lending. Leverages can be as big as in the ratio of 250:1 in the case of forex trading meaning that a trade of the value of 250 dollars can be placed with only one dollar in the account. In CFD trading, margins can be as low as 5%, meaning that a trader pays only 5% of the total value of the contract. There is no collateral involved but the system works extremely efficiently and advantageous to both the parties involved; the trader and the broker.

It is actually a risk free loan of sorts because the moment the market moves against the trader’s position and there is not enough balance in the account to cover losses, the system alerts the traders to deposit more money in the account. If the trader fails to do so, the system automatically closes the position.

It is true that margin lending allows traders to make money quick if the market moves favourable to the position taken by the trader. However, the opposite is also true. The reality is that it can also prove to be a one-way ticket to the poor house. It is thus important to understand margin lending in its true perspective and trade with caution.