UK investors can take more profits with margin trades, which allows them to borrow funds from their broker to purchase more securities than their available cash would permit. However, margin trading comes with increased exposure that needs careful management.
What Is Margin Trading?
Margin trading, also known as leveraged trading, is a strategy in which positions are opened with a deposit known as a margin. In this approach, a broker provides the necessary funds for the full value of the trade, and the margin serves as collateral. The required margin deposit is determined by the margin rate and expressed as a percentage of the total trade value.
For instance, a traditional broker would require a full £2,000 if an investor wants to purchase 10 shares priced at £200 each. However, only £400 would be needed with a margin rate of 20% and the trader would still be able to control a position worth the entire trade value. It is important to note that potential losses could exceed the initial investment if the market moves unfavourably since the initial deposit does not cover the total market exposure. There are three important terms to note in this type of trade.
Initial Margin
This is the minimum amount required to open a position. It is also known as deposit margin or simply the deposit.
Maintenance Margin
These are the additional funds that a broker may request if a trade moves unfavourably. The maintenance margin ensures that the account holds enough funds to maintain the position’s current value and cover any losses.
A Margin Call
This is a notification sent when the capital in an account falls below the required minimum to keep a position open. The trader may need to deposit more money or close positions to reduce the required maintenance margin.
UK Leverage and Margin Limits by Asset Type
The Financial Conduct Authority (FCA) regulates the financial services industry in the UK. One of its main roles is to protect retailers and keep the industry stable. Although leverage is a good tool for pro traders, it can be dangerous for a newbie. The FCA has limits on leverage for forex, CFDs, spread betting, and other options, depending on the volatility of the asset or currency pair.
The maximum leverage allowed is 30:1 for major currency pairs.
Minor currency pairs and gold have a limit of 20:1. Single stock equities can be traded with a leverage of up to 5:1, and cryptocurrencies are capped at 2:1.
How Trading Apps Help Manage Risk in Margin Trades
There’s always some form of risk with any investment when market prices do not move as expected. This risk is even more significant with the use of leverage because it magnifies both profits and losses. That’s why modern trading apps offer several features to help manage and reduce these risks.
Risk Protection Orders
Trading apps are equipped with different types of orders for risk management. The two most common are stop loss and limit orders.
Stop-Loss Orders
A stop-loss order is a pre-set instruction to automatically close a position if the market price moves beyond a certain level.
● The stop-loss is set below the current price when you buy an asset.
● The stop-loss is placed above the current price when you sell.
This tool helps limit potential losses as it ensures positions are closed before the market moves too.
Limit Orders
A limit order tells the platform to execute a trade when the market reaches a point more favourable than the current level.
These orders help traders lock in profits or enter the market at a better price. Many platforms even combine stop-loss and limit orders into a stop-limit order.
Guaranteed Stops
Market fluctuations can sometimes cause slippage, where an order is executed at a different price than requested due to rapid price changes. Some trading platforms offer guaranteed stop orders to prevent this. This type of order ensures trades close at the exact price specified regardless of market conditions. It is free to place, but a small premium is charged if it is triggered.
Alerts and Risk Management Features
These alerts notify users when an asset reaches a specific price level or moves by a certain percentage or number of points. Trading apps provide customisable price alerts through email, SMS, or push notifications.
Negative Balance Protection
Some apps automatically close positions when an account is on a margin call. Many regulated platforms also offer negative balance protection, which ensures an account is reset to zero at no cost, even if it goes below that. This feature allows traders to never owe more than their initial investment.
Use Trading Apps to Trade Smarter and Safer
Margin trading allows UK investors to improve their market exposure but also carries some risks. The Financial Conduct Authority (FCA) has set regulations to help manage these risks, though traders must also take advantage of tools available on modern trading apps. Features such as stop-loss orders, limit orders, guaranteed stops, price alerts, and negative balance protection help protect investments and reduce losses.
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