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Margin Trading in Australia: Overview and How it works

TABLE OF CONTENTS

Margin Trading in Australia: Overview and How it works

Margin Trading in Australia: Overview and How it works

Vantage Updated Updated Thu, September 22 02:22

The allure of leverage attracts many investors to margin trading as it allows traders to trade large positions with a smaller amount of capital. In essence, it gives traders more bang for their buck when it comes to capitalising on market movements. Yet, it might not be suitable for everyone. Throughout this article we will explain the concept of margin trading and show you how you can start margin trading in Australia today.

What is Margin Trading?

Margin is essentially the deposit or collateral a trader has to pay to open and maintain a leveraged position in a specific asset class using a derivatives product.

Benefit of Margin Trading

The benefit of trading on margin is that traders can gain full exposure to a particular market at a fraction of the cost. This can prove extremely beneficial to traders as it magnifies the potential profits garnered from a successful trade. 

Risks involved in Margin Trading

However, trading on margin can also result in the magnification of potential losses should the trade go in the opposite direction that the trader desires. 

Therefore, it is essential before beginning to utilise leverage and trade on margin that a trader has a good understanding of market dynamics, a trading strategy that incorporates various risk mitigation tools, and the mental wherewithal to cut losing trades early and let winners fully play out. 

Initial and Maintenance Margin

There are two components of margin to consider when placing a trade; initial margin and maintenance margin. 

Initial Margin

The initial margin is the amount a trader has to put forward as collateral to initiate either a long or short position. It can also be referred to as the deposit margin or just simply as a deposit. 

Maintenance Margin

Maintenance margin, on the other hand, is the amount of capital that a trader must have to fund the current value of the open position and cover any running losses. The initial margin will usually come in percentage form. 

Start Margin Trading in Australia

When trading on margin, the broker that is being used as a counterparty on the trade allows the trader to deposit a percentage of the full notional position upfront. 

The amount of margin required is determined by the trading provider’s margin system and on the particular asset class being traded. The margin required also informs traders of the overall amount of leverage being used during the trade. 

Leverage is an amplifier of capital, allowing traders to trade position sizes larger than the amount of capital within their individual trading account. It is often expressed as a ratio, such as 30:1. 

Now that we understand the concepts of margin and leverage, let’s run through an example, when starting margin trading in Australia, using Vantage as the trading provider. 

You can start CFD trading in Australia and utilise the expertise of an experienced team in everything from Gold Trading to CFD Indices, Crypto CFD trading and Forex trading in Australia.

CFDs allow you you speculate on the price movements of an instrument without actually owning it.

How Does Margin Trading Work

The margin for trading specific assets with Vantage are listed below. Remember to use the tools listed above to determine your initial margin and maintenance margin requirements. 

CategoryInstrumentLeverage RatioMargin %
ForexGBPUSD30:13.33%
ForexEURUSD30:13.33%
ForexAUDUSD30:13.33%
Precious MetalsGold CFD (XAUUSD)20:15%
IndicesDJ3020:15%
IndicesNASDAQ20:15%
CommoditiesCL-OIL10:110%
Share CFDsTesla Share CFD5:120%
CryptocurrenciesBTCUSD2:150%

With Vantage, you can trade any of the major Foreign Exchange pairs with 30:1 leverage. This equals a margin percentage of 3.33%. 

Using this leverage ratio for our example, let’s say that you want to open a long AUD/USD position with a notional value of $1,000. The initial amount needed to fund this position would be $1,000 x 3.33% = $33.3. This simple example highlights the power of leverage, with a deposit of $33.3 allowing the trader to gain exposure to $1,000 worth of AUD.

However, you must keep in mind that once you have opened your position you may be required to add more capital if the trade begins to go against you and the initial margin is no longer enough to keep the position open. In this situation, your trading provider will be forced to place you on a margin call and you will have to deposit additional funds to keep the position open. 

Key Points to Takeaway before Trading on Margin

In this article, we have covered the basics behind margin trading, the risks and benefits of trading with leverage, and how to utilise limited amounts of capital to make outsized gains. However, there are several key points to keep in mind when trading with leverage. These are the following: 

  • Trading on margin means you are only required to put down a deposit or collateral to open a position. 
  • The amount of margin required is dependent on the amount of capital in your account, the asset being traded and the form of derivative contract being used. 
  • Margin increases your exposure which can magnify not only your profits but losses as well. 
  • If you don’t retain sufficient capital in your account to cover your maintenance margin requirements your position will be closed out and your losses locked in. 

Margin Trading with Vantage

Vantage gives traders the ability to trade on margin. With competitive spreads, traders can go long or short on Forex pairs and derivatives of Cryptocurrencies, Indices, Commodities and Shares five days a week, to take advantage of any opportunities you may be presented with.

It is simple to start CFD share trading with the right resources to help you.

You can open your live trading account in less than five minutes with Vantage to start margin trading. Vantage also provides a free demo account. This will allow you to practice various trading strategies and techniques without having to deploy your own capital.

Disclaimer: The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our client. No representation or warranty is given as to the accuracy or completeness of this information and therefore it shouldn’t be relied upon as such. Any research provided does not have regard to specific financial situations, needs or investment objectives. Vantage accepts no responsibility for any use that may be made of these comments and for any consequences that result. Consequently, any person acting on it does so entirely at their own risk. We advise any readers of this material to seek professional advice where necessary. Without the approval of Vantage, reproduction or redistribution of this information isn’t permitted.

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