Margin trading is a complex strategy that lets investors explore massive gaining opportunities with a small budget and some more risks. Cross and isolated are two types of margin accounts, which serve different purposes and use different strategies. Both types involve opening trade positions with the broker’s money but differ on the margin requirements and the collateral a broker may request.
Let’s dive deeper into these two concepts and the difference between cross-margin and isolated-margin trading.
Margin Trading Defined
Margin trading entails borrowing money from the broker to finance high-value trading positions that offer high gains opportunities. Depending on factors like the required maintenance margin and the initial margin, a broker may open a margin account for a client. This approach might be dangerous since the trader incurs debt to the broker and stands to lose more money than usual if the market doesn’t go in their favour. When traders are short on funds but still want to purchase or sell a significant quantity of an asset, they often resort to this strategy. Initial margin, the amount or percentage a trader must cover to purchase or sell an asset, is one of the two primary criteria. A trader must also retain a certain amount of cash or security in their equity at all times to prevent a negative equity margin call.
Isolated margin is a risk management tactic to trade with a margin account. This way, you avoid damaging your whole account or balance using leverage because you are isolating a specific trade from the whole account. Using an isolated margin account, a trader can borrow funds from the broker to fund a single position, while initial margin and margin maintenance apply to that specific trade and do not affect the entire account. The collateral used for isolated margin is determined in independence from the full account’s equity and is only based on collateral the trader puts for that specific market position. This way, a trader does not risk the whole account if a margin call happens or a trade moves sideways because the risk is isolated.
The other type of margin account is the cross margin, which is the opposite of the aforementioned isolated margin. Cross-margin trading entails using the whole equity and account in the leveraged market position. This way, the initial margin and margin maintenance requirements are applied to the whole equity and may affect other traders if more than one position is open. This is a riskier margin approach, in which some investors prefer to share the whole account equity while opening new market positions without allocating new collateral or securities.
Is Margin Trading Better Than Regular Trading?
This question has no clear-cut answer because it depends on the trader’s preference, trading style, capital, experience, and the financial market they intend to participate in. Risk-taker traders usually go for margin trading to use leverage and explore high-value trade positions that may render great returns. Risk takers are usually aware of the outcomes if the market does not move in a preferable direction, but they hope to offset the losses by opening another leveraged position. Moreover, some traders prefer taking the golden mean by choosing an isolated margin account, which allows them to explore leveraged market positions without affecting the whole account or other trading positions.
Cross and isolated margins are two types of margin accounts which traders use to leverage their market positions and borrow money from the broker to boost their returns at the expense of boosted risks. The account type choice relies entirely on the investor’s trading style and risk tolerance because each type comes with different risks, while both trigger boosted returns.