Definition
Margin trading allows a trader to control a larger position by posting part of its value as collateral. In spot margin trading, borrowed funds or assets finance purchases or short sales and create a repayment obligation. Derivatives also use margin, but posting collateral for a contract does not necessarily involve borrowing the underlying asset.
How It Works
For a simplified spot example, a trader contributes 1,000 USDT and borrows another 1,000 to buy 2,000 USDT of an asset. A 10% price decline reduces the holding to 1,800; after repaying the 1,000 principal, equity is 800 before interest and fees. Thus a 10% asset move creates a 20% loss on the initial equity.
Platforms monitor collateral against maintenance requirements. If equity becomes insufficient, they may liquidate positions or sell collateral under their rules. Cross and isolated arrangements differ in which balances support the exposure.
Key Considerations
Borrowing costs, fees, and adverse prices can reduce equity even when a trade remains open. Liquidation can occur before the collateral is entirely exhausted, and fast markets can worsen execution. The margin amount is not a guaranteed maximum loss under every arrangement. Understand the debt, collateral scope, and liquidation calculation rather than equating a chosen leverage number with a complete risk limit.