What is margin trading?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
Margin trading uses a deposit as collateral to open a position several times larger than that deposit, and it allows selling an asset you do not own. Gains and losses scale by the same multiple. If the collateral runs short the position is force-closed, and the deposit can be lost.
Key points
- Collateral backs a position larger than the deposit itself
- You can open a position by selling first
- Falling below the maintenance ratio triggers a forced close
- Losses can exceed the deposit and leave a balance owed
Definition
Trading in which a deposit serves as collateral for borrowed funds or assets, so a position can be opened without full payment. Positions are normally closed out against an opposite trade rather than settled by delivery.
Post 100,000 yen and open a position five times that size, and you are exposed to the price moves of 500,000 yen. A 10% move is 50,000 yen — half your collateral. The arithmetic runs identically in both directions, which is exactly what separates margin from spot.
Keeping a position open requires the margin ratio to stay above the level the exchange sets. As unrealised losses push it down, the exchange issues a margin call, and if the ratio is not restored the position is closed out automatically. The thresholds and how often they are checked differ from one exchange to another.
Holding a position overnight normally incurs a daily interest or funding charge on the borrowed amount. That cost accrues even when the price does not move, and it grows the longer the position stays open. Rates and collection times vary by exchange, so check them before you start.
Watch out for
- · In a violent move the forced close may execute too late, leaving losses above the deposit and a balance you are asked to pay
- · Liquidation is automatic, and a later price recovery does not bring the position back
- · Available leverage and product terms differ by country and exchange, and can change with regulation