Mechanism of Margin Trading
The financial market, as the name suggests, is an economic system in which participants buy and sell financial products. This system includes many participants such as banks (who sometimes act as a “market maker”), Cryptocurrency exchange brokers (such as Binance), financial products (funds) and individual investors. Products bought and sold by participants are called financial products or assets.
In most cases, a financial product is a contract that reflects the needs of both the buyer and the seller. One party to the contract is responsible for providing financial assets (spot or futures, unconditional or conditional), and the other party needs to pay (currency or securities).
An important feature of financial markets is that currencies or securities can be considered commodities. Of course, general commodities and raw materials are traded in financial markets. Based on the commodities traded, we can roughly divide the financial market into three categories, namely the foreign exchange market, the stock market and the raw material market.
Another feature of financial markets is the normalized trading volume (size/dimension of the contract) measured in “lots”. In the foreign exchange market, a standard unit of “lots” is equivalent to 1,000,000 units of the target currency. In reality, this trading volume (1 lot) is rarely bought and sold in foreign exchange transactions, and generally speaking, the trading volume of each transaction will be 10 lots or more.
However, such trading volume is not suitable for all investors, so Cryptocurrency exchange brokerage companies provide their services to the Cryptocurrency exchange market, using leveraged trading to give individual investors an opportunity to operate and profit in the Cryptocurrency exchange market.
Example of Leveraged trading
Leverage works like this.
For example, a trader opens an account with a brokerage firm (sometimes called a guaranteed deposit).
This deposit is treated as a security deposit (reserve) for the client’s ability to repay what he owes to the brokerage firm.
When opening a trade (opening a position), a certain amount of lots (margin) guaranteed for the trade is frozen on the client’s account.
And the broker needs to make up the lot here, which may be 50, 100, 200 or 500 times the margin.
Some brokers usually regard leverage as a loan provided to customers for the entire trading period, and calculate interest or charge a certain commission, but Binance provides customers with leveraged trading for free.
The size of the lever can be 1:50, 1:100, 1:200 or even 1:500.
By using leveraged trading a trader can access the Cryptocurrency exchange market with only a relatively small deposit.
So assuming a trader deposits $10,000 and applies 1:100 leverage, the maximum possible volume for this trader is equal to $1,000,000 (one million dollars).
In addition to offering leveraged trading, brokers also offer cent accounts and micro-lots (less than 0.1 lots).
Thanks to this, traders have the opportunity to operate a trade with a minimum margin of 1 USD (equivalent to 100 units in a cent account), and through leverage the trader can open a position of 10,000 units (0.1 lot); Less than or equal to 10,000 units are called microtransactions (sporadic transactions).
Many brokers allow such micro-transactions to be opened not only on the Cryptocurrency market alone.