No matter how long you have been in trading business , you would have heard the term ‘margins’ in investment and market terms . Margins is when you procure money from an external source, usually a bank or a broker, to buy more stock or more of that commodity. Trading commodities on margins is an option, just like any sort of investment decision and methodology that is available to the average investor on the market today and this can range from traditional commodities to more dynamic and unconventional markets like the Forex market.
This is a risk you are taking to invest more on a commodity in a hope that the returns will be reflected. You make a clean profit and return the borrowed money (with possible some marginal interest). Traders use this method when they are pretty sure that a market will be moving in their favour in every sense of the word, they put all their eggs in one basket. Understanding trading commodities on margins is very important if you choose that route, as not only are the benefits great, but so are the risks, so you can lose a lot of money that is not your own if you make a big mistake. In normal terms, when you buy a commodity in cash, you will only gain about half of the value of the investment; but when you use margin trading, you will earn the full amount.
Earning the full amount is good, but then you have to consider that you will need to pay back the borrowed amount with attached interest. Of course, the opposite reality stands true. If you lose your investments, then you will not only lose the money completely, but you will have to pay back the borrowed amount and the accumulative percentage interest over time, which can be a combination to disaster for traders alike. Keep in mind that this possibility of losing is much more than you initially invested.Some of these traders often have to top up their accounts with their own money to cover up any and all losses they have made in the course of their margin trading. In the course of it all, remind yourself that the option to sell some of the stock to decrease you securities may be a viable tactic to shore up your losses and pull out when things are looking to go pear shaped. Some financial institutions like banks and brokerages will automatically do this for you to shore up your losses – because they need to ensure that you have enough capital to pay back your loan. When trading commodities on margins, these are some of the things you need to know about, and if you follow these simple principles, then everything should be ok.