A brief guide to margin trading

The crypto coin market has shaken the world and completely changed the way investments work. This year has worked in favour of crypto coins proving that to get a higher rate of return, you must be willing to bet against higher risks. It has given birth to a new financial market with anonymity and security.

When an asset's value starts increasing at such an alarming rate, it allures people to start investing their money in it. The same has happened with cryptocurrency. People are willing and want to bet bigger, even when they don't have sufficient funds. To solve the problem at hand, margin trading began in crypto coins as well. This has allowed people to gain high yields but on the downside, it has caused bigger losses. If you are interested in knowing more about margin trading, then you are at the right place. We have made a guide to help you understand what it is and how it works.

What is margin trading?

It is the process of borrowing a certain amount of money or capital to invest in cryptocurrencies. This buying and selling are done through the help of brokers and traders who have the ability and the means to lend cash to investors. The purpose of this is to help people bet and invest a bigger amount of money to be able to earn a higher level of profits.

What is a margin call?

In this trading method, there is a need for keeping a minimum equity requirement. A certain amount of cash or security is to be maintained at all times. This amount acts as collateral for brokers and firms against losses that might occur.

However, before using the amount kept in collateral, a margin call occurs in which the broker will ask for adding extra funds in the deposit to meet the requirement due to losses. In failing to do this, the broker has the right to use the existing funds.

Risks involved

1. Losses involved

The biggest factor to consider is the amount risk is very high in margin trading, often losses can be more than the amount invested. If the price drops, then additional funds must be invested in the firm to bear the losses.

1. Liquidation

Firms and exchange platforms monitor the prices in the market continuously. In case of a margin deficiency or inability to match margin requirements, they have the right to sell your investment without your approval.

1. Mandatory minimum balance

In this method, it is necessary at all times to keep a certain balance. The downside is that if you fail to maintain this amount, your securities can be sold off irrespective of the prices in the market.

Safe trading practices using margin

Before you dive into margin trading, here are some pointers to consider to ensure safer transactions. This will help in minimizing the risk and yielding a higher return.

• Research before putting your money in crypto coins and know about the margin requirements.
• By using a stop-loss order, the risk of losing money can be minimized to a certain extent.
• Start by investing a small amount of money that you are willing to lose in case the market fluctuates.

Conclusion

Now, that you have an understanding of the subject you can choose to start investing carefully. It is advised to always research and gain knowledge on the market trends for cryptocurrency in India. If you are looking to diversify your portfolio and invest in virtual currency, it is better and safer to opt for a reliable trading platform such as WazirX. The benefit of using a trustworthy crypto exchange is that they have the majority of coins listed and offer secure transactions.

Rea Setia is an passionate writer. She loves to share business tips and her experience about industry.