What does "margin trading" mean? Understand it in one minute and avoid the pitfalls!
Every time the market goes up or down, we always see so many people’s positions being liquidated. Liquidation is always accompanied by huge losses. If you have a liquidation, it means that your money is gone, your investment products are gone, everything is gone, and you may even owe a debt.
Therefore, we must understand what a liquidation is and how it happens, and then stay away from it.
What is a liquidation?
Before talking about liquidation, let’s talk about “closing a position”. There are two types of liquidation. One is active liquidation, which is often used to stop profit or stop loss. It is our active choice to sell the securities products in our hands.
Another type is passive liquidation, also called forced liquidation or liquidation, which means that the securities products purchased in the account are forcibly sold. The securities products here can be stocks, futures or other.
For example, if you buy a stock, you obviously did not make a selling operation, but it was forced to sell it.
Example
Xiao Ming observed that the price of apples in the market has risen. Xiao Ming also wants to sell apples to make money, so he went to the apple orchard to buy apples. The purchase price is 10 yuan/jin, but Xiao Ming only has 100 yuan in his hand, which means that he can only buy 100 yuan at most. Xiao Ming thought that the profit from 10 kilograms was too little.
So he discussed with the orchard owner and borrowed 900 yuan from the orchard owner and added his own 100 yuan, which was exactly 1,000 yuan. He bought 100 kilograms of apples and paid the orchard owner back after selling them.
If the market price of apples was 15 yuan/jin at this time, Xiao Ming would earn 500 yuan, that is (15*100-1000=500), which is equal to 5 times the profit of the principal.
But if Xiao Ming finished buying the apples, the price of apples fell to 9 yuan/jin, then the 100 kilograms of apples in Xiao Ming's hand would be worth 9 00 yuan, but 900 yuan of it was borrowed from the orchard owner, which means that Xiao Ming has lost all his 100 yuan.
If the price of apples continues to fall, Xiao Ming will lose the money he borrowed from the orchard owner. The orchard owner will not do it and ask Xiao Ming to either sell the apples immediately to pay back the money or quickly pay more money as margin. Xiao Ming is unwilling to sell at a loss and has no money to pay the orchard owner. The orchard owner will force Xiao Ming to sell the apples in his hands and take back the money he borrowed. In this case, Xiao Ming is forced to close his position, which is called a margin call.
If the price of apples falls too fast, the orchard owner does not have time to sell them at 9 yuan/jin, and finally sells them at 8 yuan/jin, and gets back 800 yuan, then Xiao Ming not only loses all his 100 yuan, but also owes the orchard owner 100 yuan.
The apples here refer to securities products such as stocks and virtual currency futures.
Conditions for a margin call
To sum up, there are two conditions for a margin call
One is that the funds used to buy securities products are not all our own funds, some of them are borrowed, and this part of the funds is called margin;
The other is that the account suffers a loss and the loss is greater than the available margin.
For example, someone has 100,000 yuan in funds in his securities account, of which 50,000 is his own funds and 50,000 is borrowed. He uses all the 100,000 to buy a securities product. At this time, the available margin in the account is only 50,000 yuan. When the loss of this securities product exceeds 50,000 yuan, it may be forcibly closed.
Of course, it does not mean that when the loss of the account is greater than the available margin, it will cause a margin call. Generally, there will be a margin call ratio, that is, the margin call will occur when the loss exceeds the available margin by a certain percentage.
Of course, before the margin call, if the investor adds margin in time, it will not cause a margin call.
The relationship between margin call and loss
We all know that investing in stocks will also result in losses, and even the principal will be lost, but this loss is different from a margin call, because we use our own money to invest in stocks, and there is no possibility of forced liquidation. Even if the stock is delisted, as long as you don’t want to sell it, you can keep it.
For stock investment with borrowed money, not all margin calls will occur, mainly depending on the source of funds.
If the money is borrowed from an intermediary institution in the securities market, once the margin call line is touched and the margin is not replenished in time, the margin call will occur.
If the money is borrowed from relatives and friends, even if the loss is large, the margin call will not occur. This is only because of the loss of money in one’s own operation, not forced liquidation. Just find a way to pay back the money of relatives and friends.
Therefore, there is a difference between loss and liquidation. A liquidation will definitely result in a loss, but a loss may not necessarily result in a liquidation.
Pay attention
It is very scary to blow up a position. When borrowing money to invest in securities products, there is no chance to exchange time for space when encountering extreme market conditions.
Therefore, we must act within our means. If we do not have the strength, we should not easily borrow money from intermediaries for investment.
Again, for high-risk investments, it is best to use your own spare money. If you use your own spare money to invest, the initiative will be in your own hands. Even if the invested stocks lose money, as long as you do not sell, there is still hope of getting back the money.
However, once the position is blown up, it is no longer a floating loss, but an actual loss, and the money will never come back.
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