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What Is Margin Trading?

Margin trading allows users to trade with leverage on the Phemex spot market by using borrowed funds. This feature increases purchasing power and magnifies returns on profitable trades relative to ordinary spot trading. Funds used to open a margin trading position consist of the margin – which refers to the borrowed funds, and the collateral – which the trader puts up themselves. Interest must be paid on the borrowed funds so when the position is closed, proceeds are used to first repay the margin loan. You can read more about margin trading on our Blog article – What is Margin Trading (Blog).

Margin trading can unlock greater capital efficiency for some users. For example, in regular spot trading if you had $100 in your spot wallet then you would only be able to purchase $100 worth of crypto on the spot market. Using margin trading, you may be able to borrow an additional $300 on margin against your $100 collateral, enabling you to take a position of $400 worth of crypto. Doing so could amplify both your profits and losses, as interest must be paid on the loan.

While margin trading and contract trading both allow the use of leverage to enhance returns, there are some key differences between the two. The biggest difference is the market in which they are traded. Margin trading occurs on the spot market, meaning all margin related orders are spot orders. On the other hand, contract trading occurs on the derivatives market that has a separate orderbook. The amount of maximum leverage possible for margin vs. contract trading may also differ. Because trading on margin requires the trader to repay borrowed funds with accruing interest, it’s typically more suitable for those looking to open short-term positions. To learn how to margin trade on Phemex, check out How Do I Margin Trade on Phemex.

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