The Securities and Exchange Board of India (SEBI) new margin rules that took effect on September 1 have sent the bourse roiling. On September 15, the stock exchange’s dash segment daily turnover fell by 29 percent compared to the previous month’s performance. SEBI’s new margin trading rules have elicited a heated debate.
Some brokers feel that the regulations will make stock margin trading cumbersome. Part of the watchdog’s new ruling regime seeks to make the process more efficient and halt broker margin misuse. Segments of the brokers have argued against the same-day settlement and the repeal of the Power of Attorney practices, saying that they will hinder aggressive trading.
Margin trading is buying securities or cryptocurrencies using funds lent by a broker. As an illustration, with Ethereum margin trading, a cryptocurrency trader can buy more ethereum (ETH) tokens than they can afford to. All that a trader needs to do is to pledge their ETH holdings as collateral, then borrow more funds from the trading platform to buy additional ETH for trade.
Ethereum margin trading is a very attractive trading process for cryptocurrency holders bullish on the blockchain and its token’s performance. Buying ETH with leverage is a short-term trading process for speculators that are in the crypto markets to make a profit off of its high volatility.
How does margin trading work?
Margin is the purchasing of digital currencies or traditional securities using a broker’s funds. This process is like acquiring a mortgage. All a homebuyer needs to do is to put down a percentage of the equity and receive on loan funds from the mortgage provider to settle the rest of the property’s costs.
Should the value of the real estate property rise, the borrower could sell and make a profit on the purchase price because all they did was pay a down payment. Margin trading uses leverage to get the most out of the trading process in a bull market. This credit used as leverage could however work against this same trader in a bear market.
Should the property fall in value, perhaps because of an economic recession, the outstanding debt loaned by the mortgage provider will exceed the value of the property. The debtor will then owe more than they own. Leverage is therefore a dual feature that can lead to massive profits or losses in crypto or stock margin trading.
The margin trading process
- Traders will speculate on an asset’s movement in a specific trading session. Their margin account will provide more of the assets than they can afford at a go, and the broker will keep the assets bought as collateral.
- Opening a margin account, they will deposit a percentage of Ethereum, money or stocks to a margin account upfront. The market refers to this amount as the minimum margin (MM). The minimum margin’s purpose is ensuring that the broker will recover some lent assets, crypto or cash should the trader’s strategy fail.
- To begin margin trading, the trader will give an initial margin trading percentage of the total value of the margin trade as dictated by the broker.
- The trader will need to maintain the trading session’s minimum margin because volatility can affect stock or crypto prices significantly. Should the session’s minimum margin fall below the set threshold, then the trader will need to add more money, crypto, or stocks to the account to settle the difference. If the trader fails to add to the maintenance margin, the position is liquidated.
- At the end of the trade, the trader will sell or buy off the assets, to pay the broker’s leverage and any other trading charges.
Ethereum margin trading tips
Ethereum is the world’s second-largest cryptocurrency market capitalization after Bitcoin. Unlike Bitcoin’s status as a store of value, Ethereum has a lot of developers and community activity making it effective for margin trading.
Below are a few tips on how to trade Ethereum:
- New margin traders should start with demo trading, then low leverage and small position trades for risk management.
- All traders should take profit, stop loss and other order types to automatically close their trading positions for safety.
- Traders should spread their positions into diverse positions for incremental profits as per their trading and risk management strategy.
- A thorough study of both technical and fundamental factors will help the trader speculate best on price movements during margin trading