If you are in the trading world, Margin Trading and Futures Trading are not new words to us, we hear and make use of this forms of trading often.
Most traders still use Margin and Futures Trading interchangeably, they are yet to know the key difference, or are they completely similar, we will get to know that before the end of this post.
Margin Trading.
Margin Trading is the act of borrowing money to make an investment from a brokerage platforms. The platforms that offers this loans can be a crypto exchange or a forex brokeage company.
The need for Margin Trading is to give investors with small capitals the opportunity to open a trading position that is big. You have a chance to make huge profits from your investment, and you also stand the chance to easily loose the small money in your account, it is very risky and can be similar to gambling.
Note that Margin Trading platforms will demand for a collateral before allowing you to take loans and open big trading postions. The collateral is the small money you deposit with them before demanding for the loan.
Futures Trading
Futures Trading is like a contract, which involves agreement between the buyers and sellers to fix an asset in a particular price for the future or a specified date.
Futures Trading is more of prediction, you are trying to predict the price or worth of an asset in the future. Futures trading is a contracts which usually has an expiring dates.
The catching part of Futures trading is the leverages. You have to opportunity to increase your positions and buy a huge amount of an asset by paying just a little amount of money. Take example Bitcoin, you can get $12000 worth of the coin for just $1200, that is the advantage of leverage, but you should note that it is also risky as you can easily loose your funds.
The difference between Margin Trading and Futures Trading.
1.Assets.
When it comes to assets Margin Trading is used to trade majorly
- Stocks
- ETFs
- and various spot markets.
Why Futures Trading is used to trade assets like;
- indexes
- commodities
- derivatives
- and bonds.
2.Leverages
When it comes to leverages the difference is clear, Margin Trading offers leverage of upto 20%. Why Futures trading offers leverages more than 100%. The risk there with high leverages you can make huge profits and you can also loose hugely, you just have to be wise when making your trading decisions and taking advantage of this opportunity offered as leverages.
3.Investors
Most short-term investors always engage with Margin trading because it gives them what they want very fast. Why long-term investors are more convenient using Futures trading.
4.Duration
Futures trading is a contract and it has an expiring date, there is a limit on when you can hold your positions in the markets. Margin trading on the other hand does not have an expiring date, you are free to hold position as long as you want.
These are the key basic differences between Margin Trading and Futures Trading. You can no longer get confused when you hear this two trading terms, and you can now avoid using it interchangeably.
Note: Trading is very risky, don't go into this types of trading just mentioned above without proper knowledge or you might loose your money. Don't use leverages if you are yet to know the risk involved.
Image edited in Canva.