Margin trading originally meant that the buyer and seller would provide a margin as collateral to ensure the performance of future contracts. It was originally a hedging financial operation arrangement. Therefore, margin trading generally has a leverage effect and amplifies the characteristics of the scale of funds. At present, many banks and brokers also provide this arrangement, allowing investors to use less funds to obtain greater flexibility, and this trading method has derived a variety of financial products that use "margin" trading, such as futures trading, options trading, foreign exchange CFD trading (foreign exchange, stocks, stock indices, commodities, virtual currencies, etc.)
When investors trade on a trading platform (supplier), they do not have to put up the full amount of funds, but they must pay a certain percentage of the total value of the relevant contract to a third party for safekeeping. The percentage usually ranges from 5 to 10% as a margin for fulfilling the contract, which is further divided into initial margin and maintenance margin.
The initial margin refers to the amount that should be paid when establishing a contract; the maintenance margin refers to the amount required to maintain the position after the position is established.
When the price moves against one's own side, losses will occur. If the balance left after deducting the floating loss from the initial margin is lower than the maintenance margin level, the investor will receive a margin call notice. The appearance of margin call is because the account balance in the investor's account is lower than the maintenance margin standard stipulated in the contract. From the perspective of performance, the account balance may not be able to withstand more losses of the relevant contract. If the investor cannot replenish the margin to the prescribed level within a certain period of time, or the account balance is lower than the minimum margin requirement, the contract in the account will be forced to close.
Some trading platforms will issue margin calls or change margin requirements in advance when market volatility increases or certain high-risk events are approaching. In essence, the increase in margin is also a safety mechanism to protect the account, especially when the market is abnormally volatile.
Since investors only need to put out part of their funds to trade, this flexibility also brings some risks. Therefore, most experienced traders will also put in more funds than the initial margin to reduce the chance of margin calls and avoid forced liquidation during market fluctuations.
All financial products traded on margin carry a high degree of risk to your capital. They are not suited to all investors and you can lose more than your initial deposit. Please ensure that you fully understand the risks involved, and seek independent advice if necessary.