“Trading on leverage,” also known as “margin trading,” is a method of obtaining greater exposure to the financial markets than would be possible using only deposited funds. The investor lends some of the money they will use to buy securities and then uses those borrowed funds as additional buying power. This allows them to purchase more than if only their deposited funds were used, but it also increases the risk of losing more money than they have in their account.

Types of margin accounts

There are two most common types of margin accounts, each with its advantages and disadvantages:

• A general margin account allows an investor to borrow up to 50% of the total value of securities purchased.
• A special margin account allows an investor to borrow up to 100% of the value of securities purchased. This option is most useful for investors who plan to hold penny stocks.

As with any type of borrowing, there are costs associated with trading on margin. Interest rates charged by brokerage firms can vary widely, but it is common for investors to pay margin interest rates of around 5% on general margin accounts and between 7% and 9.5% on special margin accounts, depending upon their creditworthiness.

How do you protect your account from a margin call

The best way to protect your account from a significant decline is with stop-loss orders. If you have a special margin account, you can buy protective puts or other types of options to help limit your risk. If you have a general margin account, you can place stop-loss orders on the securities in the margin account so that they will automatically be sold if their value declines by a certain percentage.

When investing on leverage, your broker is required to obtain permission from you before making any trades for your account other than the initial purchase transaction that establishes your margin account. In most cases, you will have to sign a “Margin Agreement” with your broker to establish your margin account. In addition, every brokerage firm has specific requirements for establishing a margin account, so check with them before making a trade.

Margin trading can be an excellent tool for experienced investors who know what they’re doing and the risks associated with it. However, there’s no free lunch when investing on margin, so ensure you understand the risks before starting with your first margin account.

For instance, if you were to purchase 100 shares of AAPL stock with $5,000 in your account, it would require all of the money that you have available to buy those 100 shares. However, if you were to purchase those 100 shares on margin (also known as ‘buying on leverage’), it means that you will borrow the additional funds that you need to buy those 100 AAPL shares instead of using all of your deposited funds. This is because the brokerage firm where your account is held will lend you money and use it as additional buying power to purchase more shares than if only your deposited funds were used.

For instance, if you are into crypto, you will find an exchange like Binance that allows a 20X margin on BTC spot trade. This means that if you have $100 on your account, you can place an order worth up to $2,000 (both short order and long order). This is what margin trading is all about—trading more than you can afford.

Other methods that you can use to avoid a margin call are:

• Don’t Risk More Than You Can Lose: Gaining high profits is tempting. But, no matter your strategy, margin trading can be pretty risky, and an order can go against you easily. So only invest what you can afford to lose. You don’t want to get a margin call at any time.
• Take Profit: You should set a take profit order to close your position when the profits hit a particular amount. Since crypto is highly volatile, you can get out before a certain stock or trade gets in another direction.
• Make use of negative balance protection: Use a trading platform that absorbs the loss and reset your equity to zero in case of market conditions cause your equity to go negative. Platforms like eToro provide this protective measure.

Best platforms for margin trading

If you are trading on cryptos and stocks, these are some of the platforms that you should consider using (and play with) if you are looking to invest on margin:

• Binance – Best for crypto (Upto 20x spot trading margin)
• Capital.com – One of the Best Margin Trading Brokers for Mobile Traders
• Libertex – Best Margin Trading Platform for Professional Investors.
• Poloniex (for margin trading BTC/ALT)
• Bitfinex (for margin trading all cryptos)
• eToro (for margin trading stocks only)
• TD Ameritrade (for margin trading stocks only)
• Interactive Brokers (for margin trading all cryptos and stocks)
• Charles Schwab – The Best Broker for Margin Trading Futures

Other platforms you can use are ByBit, Kraken, and Phemex.

It is important to know that each platform has its requirements for margin trading accounts. For instance, on eToro, you can only use the maximum 50% of the money you have deposited for margin trading. On Poloniex, it can be as high as 100% of the deposited money. On Bitfinex, it can be up to 3:1 margin trades (meaning that only 1/3 of your deposited funds are used for margin trading). Interactive Brokers is somewhere in between, requiring around 30-50% of your deposited funds for margin trading.

The most important thing is to familiarize yourself with the percentage of margin each platform requires on the specific currency, crypto, or stock you plan to trade.