When opening an account with an online broker, investors and traders are typically greeted by one of two options: a cash account or a margin account. A cash account is a more common account for standard investing, while margin accounts are typically sought after by more sophisticated traders seeking to maximize the use of whatever capital they have to allocate. Margin accounts are also typically geared toward derivatives trading, such as Futures, Options, and CFDs.
This guide will in detail explain everything you need to know about a margin brokerage account, including what it is, why anyone would want to use it, the risk associated with it, the benefits, and much more.
What Is A Margin Account? The Fast Track To Financial Success
To understand what a margin account is, you must first learn the definition of margin. In the world of finance, margin refers to the money borrowed from a broker that is used to take position in various investments.
A margin brokerage account lets investors deposit cash or other assets to be used as collateral. Any securities held on the broker can then be used for borrowing money and adding to a margin balance based on the total collateral deposited. Acting as the lender, the brokerage then charges an interest rate on the amount of money borrowed.
How A Margin Account Works: Margin Trading Explained
The most common reason for an investor or trader taking advantage of a margin account over a standard cash account, is to utilize leverage.
Margin accounts allow traders and investors to take position sizes larger than what the capital deposited would otherwise allow for. If an investor or trader makes a buy order and the underlying contract or asset rises in value, a larger return is possible beyond what a regular spot or cash position would have provided. This makes margin trading especially lucrative for skilled traders who can manage risk accordingly.
On the flipside, leveraged positions can result in capital loss at a faster rate than when trading on a cash account or spot trading platform, therefore it is imperative to learn proper risk management strategies. Because of the caution required, margin accounts are typically reserved for experienced or skilled traders.
Brokers also charge a fee on positions and an interest rate on positions held using leverage, making overall money management a critical factor to overall success.
If a margin account’s balance or account equity falls below the required maintenance margin level a margin call will be made to the investor or trader. Because margin positions are collateral-based, accounts can go in the negative. For example, a position is so underwater that all available maintenance margin is gone, and although the broker began a liquidation process to fulfill any open contracts, with slippage and fees the account balance can become negative.
Depending on the platform, investors may be held liable if outstanding balances aren’t paid up and settled. A liquidation occurs when a broker must sell all open positions in order to cover the outstanding margin balance with whatever collateral has been deposited. Investors and traders can lessen position size or deposit more funds to prevent this from happening, and most platforms give at least some warning before this occurs.
Ultimately, it is up to the trader or investor themselves to manage margin positions appropriately and effectively. Margin accounts aren’t for the faint hearted and in many jurisdictions carry certain legal restrictions and financial requirements. In other cases, platforms might be limited to certain levels of leverage, regardless of available account margin.
Margin and leverage are not the same thing despite often being confused, especially within the cryptocurrency community.
Example of Using A Margin Account To Trade Bitcoin
An investor wants to take out a position size of one Bitcoin back when the cryptocurrency was trading at $10,000 per coin. A cash position of this size would require a full $10,000 deposit. The $10,000 in cash would be traded for the one full Bitcoin, and the investor is at the mercy of the market price of the BTCUSD trading pair.
With a margin account, a user could deposit $100, and using the power of 100x leverage turn the capital into a $10,000 position equal to one full Bitcoin. With a margin account, it is wise to deposit more capital than the position size the user intends to take, so in this example, a trader would want to deposit more than $100 to allow for the market to move against the position – at least initially, even though the position itself will only be $100 worth.
In both examples, Bitcoin price rises to $50,000 per coin. In the cash account, the investor earns $40,000 profit with the $10,000 they had at stake. The margin account, however, makes $49,900 profit with only $100 and enough money to cover margin maintenance requirements.
The benefits a margin account offers over a cash account are as clear as day.
Cash Account Vs. Margin Account: What Is The Difference?
A cash account is very different from a margin account, and after learning the differences it will become apparent why margin accounts are typically considered more advanced accounts but also provide many advantages over cash accounts.
You can almost think of a cash account as a debit card versus a credit card. With a cash account, any positions taken will be an exact representation of the amount of USD value (or corresponding fiat currency or cryptocurrency value) of the asset. But with a margin account, much larger position sizes can be taken because the investors are relying on credit provided by the broker. A daily interest rate is also charged just like a credit card.
With a cash account, you can buy exactly what the amount of cash you currently hold will allow. But with a margin account, this is not the case.
Cash accounts are often reserved for spot trading or spot investing, versus trading CFDs and other derivatives contracts which are typically done with a margin account. Cash trading offers its own advantages, such as far greater accessibility, less risk overall, and a greater range of available assets to trade.
For example, if an investor places $10,000 into a cash account, the asset’s value would have to depreciate all the way to zero for all cash equivalent positions to be eliminated. With a margin account, the same $10,000 could be lost entirely with one improperly managed position. At the same time, a cash position in most assets would have to be worth millions in order to earn a million in ROI, while a $1 million ROI trade is possible with as low as a $1,000 margin account position, possibly lower, depending on leverage available at each broker.
Leverage offered and margin requirements vary from platform to platform, and can change depending on market conditions. When market volatility is high, for example, a broker might raise margin requirements for the safety of its customers.
Finally, another way a cash account and a margin account differ, is through letting investors and traders profit from both market directions. With cash accounts, customers can only buy and sell assets to and from cash. Meanwhile, margin accounts typically rely on contracts for assets, so traders can long during an uptrend or short during a downtrend, and profit whichever way the trend turns.
The Benefits of a Margin Account
Margin accounts are popular for a reason, despite the risk that can often be involved. Risk can be mitigated with proper strategies and in the hands of a skilled trader a margin account can be powerful.
Margin accounts enable leveraged trading. Margin money goes a lot further than the money deposited in a cash account thanks to leverage. Leverage lets traders amplify their position sizes and therefore the profits possible from each closed trade. Margin also lets traders long and short, as well as trade derivatives contracts like Futures, CFDs, and Options.
Margin accounts lets traders start small and build up capital over time, rather than requiring massive initial starting capital sizes to turn a reasonable profit. This also in a sense, reduces risk, because less capital is ever put on the line in the first place. But the risk is only reduced in the right hands.
The Risks Of A Margin Account
All investing and trading carries at least some risk of capital loss. Risks are increased with the inclusion of cryptocurrencies and other speculative assets. Adding margin accounts into the mix can be a recipe for total capital loss. But because of this risk margin accounts are the most lucrative type of trading account possible. The higher the risk, the higher the possible return, so to speak.
Margin accounts can put investor capital at risk of partial or total loss. Investors can also get underwater in their positions and owe the broker any negative account balance. Legal trouble can even ensue in the case of unpaid negative balances.
How To Manage Margin Account Risk
There are several ways that customers of a margin broker can manage against risk and capital loss, even when relying on powerful trading tools such as leverage.
The very first way to prevent risk when using a margin account and trading platform, is to clearly understand margin requirements and to learn how to use a margin calculator. This way, all risks and potential profit is clearly defined, and understanding risk in the first place is the key to prevention.
A proper trading strategy and planning that includes fundamental and technical analysis, relying on chart patterns, trading indicators, and market sentiment before entering a position, can improve the chances of success significantly and therefore in turn lower risk. Technical analysis can also help traders understand where to place stop loss orders to prevent serious loss, while maximizing profit potential.
Learning to take profit regularly and move stop losses in profit when the market moves in your favor are also ways traders can alleviate the risk associated with margin accounts. Trailing stop losses ensure profits are booked and risk is prevented.
Keeping a larger sum than necessary deposited into a margin account so margin balance remains high, with plenty of room for positions to go wrong and not risk a margin call or liquidation.
With any type of account, margin accounts carry the normal risk associated with markets moving against the position you have taken. Never invest or trade with more capital than you are comfortably able to afford to lose, to prevent any serious stress from resulting.
Keeping a grip over emotions is also a risk management strategy in and of itself.
How To Open A Margin Account And Finding The Right Platform For You
Before opening a margin trading account, be certain to seek a reputable broker. Depositing funds at any platform carries risks, so look for an award-winning platform like PrimeXBT to avoid issues.
PrimeXBT is a Bitcoin-based margin trading platform, which means users of the platform can buy or deposit BTC and use it to take positions in CFDs on forex, stock indices, gold, oil, and cryptocurrencies.
Registration is simple and takes less than 60 seconds to get started. To begin, follow the registration link on the PrimeXBT website homepage, and enter your email address.
After completing the initial information required, an email is dispatched with a confirmation link. From there, users will confirm their country of origin, and will be able to log in. Only certain legal jurisdictions and regions may access platforms like PrimeXBT, so check with your local laws.
Once logged in, you can now make a deposit to a BTC address or buy Bitcoin directly from a third-party exchange terminal. Once the deposit is made and BTC is in the account, the margin trading account can then be funded.
With an account funded with BTC, users can then open long or short positions across more than 50 different assets all under one roof.
FAQ: Frequently Asked Questions About Margin Accounts And Trading Using Margin
Using a margin account is serious business, so wanting questions answered is only normal and appropriate before beginning. Here are some of the most commonly asked questions and their answers.
Is a margin account a good idea?
Margin accounts can unlock higher earnings potential with less total capital put on the line. But accounts can be risky in the wrong hands.
What is the difference between a margin account and a cash account?
Margin accounts let investors and traders deposit collateral that is used to take leveraged positions. Cash accounts can only buy or sell the asset for cash at equivalent value, while margin accounts also allow short and long positions.
How do you qualify for a margin account?
On platforms like PrimeXBT, anyone at all from the accepted regions list will qualify for a free margin account. Some platforms do have financial requirements, however.
What are the benefits of a margin account?
Margin accounts increase the profitability of positions using less capital overall. Margin accounts let users take more positions overall and have more control over position management.
What are the risks associated with a margin account?
Margin accounts carry the risk of capital loss for those that aren’t familiar with stop losses or proper risk management techniques.
Can you make money with a margin account?
Margin accounts are the key to making the most money in markets, but carry higher risk than cash accounts. Skills are required to prevent capital loss.
Where can I open a margin account?
Anyone can register for a free margin account on PrimeXBT. Instructions on how to get started can be found above, and more information is included below.
Conclusion: Is A Margin Account Worth It?
A margin account can be like magic in the hands of a skilled trader. It can bolster profitability beyond what is otherwise normally possible, and do it in a small amount of time with little starting capital.
The likelihood of financial success is increased when combined with a broker that’s on your side, arming you with the tools needed to prevent loss and manage against risk.
PrimeXBT offers built-in technical analysis tools from TradingView so traders never are without a read on the market before taking a position. Long and short positions let traders profit no matter the direction markets turn next, and stop loss orders keep things from going wrong.
The tools and leverage are available on any of the over 50 assets on PrimeXBT, which include cryptocurrencies, forex, commodities, stock indices, and much more. PrimeXBT also offers the Covesting copy trading module for those that aren’t yet ready for margin accounts on their own.
With so many options for traders under one roof, there’s plenty of reason to register for PrimeXBT and make a deposit to a free margin account today.
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Using a margin account for leveraged trading carries significant risk and should be considered with caution. This guide should not be considered investment advice, and using a margin account is done at your own risk.
The information provided does not constitute, in any way, a solicitation or inducement to buy or sell cryptocurrencies, derivatives, foreign exchange products, CFDs, securities, and similar products. Comments and analysis reflect the views of different external and internal analysts at any given time and are subject to change at any time. Moreover, they can not constitute a commitment or guarantee on the part of PrimeXBT. The recipient acknowledges and agrees that by their very nature any investment in a financial instrument is of a random nature and therefore any such investment constitutes a risky investment for which the recipient is solely responsible. It is specified that the past performance of a financial product does not prejudge in any way their future performance. The foreign exchange market and derivatives such as CFDs (Contracts for Difference), Non-Deliverable Bitcoin Settled Products and Short-Term Bitcoin Settled Contracts involve a high degree of risk. They require a good level of financial knowledge and experience. PrimeXBT recommends the consultation of a financial professional who would have a perfect knowledge of the financial and patrimonial situation of the recipient of this message and would be able to verify that the financial products mentioned are adapted to the said situation and the financial objectives pursued.