Whether you call it entry-level, collateral, or margin, it refers to the same concept – the capital required to open a trade. The margin is locked when the trade is opened, and it’s released when the trade is closed.
A couple of years ago, you would need at least $500,000 to be able to trade on the capital markets. However, once leverage was made available not only to large institutional investors (banks) but also to retail investors, investing in the financial markets became accessible to traders with smaller capital.
What is margin?
The margin is the amount of money needed to open a trade. You can venture into trading Contracts for Difference (CFDs) on foreign currencies, commodities, indices, cryptocurrencies, etc. with less money than you would need on a stock exchange through the use of leverage. Usually, the greater the leverage, the lower the margin needed to open a trade. While trading CFD instruments, there are several margin references you need to be aware of, two of which are the initial and the maintenance margin.
Initial Margin is the amount of money you need to have in your account to open a leveraged position and it amounts to a fraction of the full value of your trading position. In other words, leveraged positions and margin allow you to gain bigger exposure in the markets with a smaller initial capital.
Let’s have a look at an example:
If you want to open a $100,000 position with no leverage (e.g leverage 1:1), you will need the whole $100,000.
But, if you want to open a $100,000 position with a 1:500 leverage, you will need $200,000 / 500 = $400 as margin.
Alternatively, you can use Traders Trust’s Margin Calculator to automatically calculate your margin.
Maintenance Margin or Variation Margin is any extra money you would need to have in your account to keep a position open in case your position moves against you. For this reason, especially with CFD trading where prices change rapidly, it’s worth applying sensible risk management by investing a maximum of 10% of your total capital in one trade. The remaining capital can support your trade on the market for a longer time, compared to when you risk a large proportion of your money on a single position.
Imagine that the maintenance margin is like a warm blanket in the winter – the larger the blanket, the higher your chances to stay warm.
Stay up to date with our newest posts, to discover what margin level, margin call and stop out are. In the meantime, put your trading knowledge to the test by executing orders in a risk-free environment and trying out trading strategies on a Traders Trust demo account.