The benefits of margin trading include being able to leverage your exposure to the markets. It is a more efficient use of your capital because you can trade without having to deposit the full value of the position you wish to open. As all of your money is not tied up in one transaction, you can use it for other investments. Remember, that while you can make large gains, you can also make large losses from a small initial outlay.
Consequently, it is important to consider your marginal trading outcomes. Margin trading is a good way of diversifying your portfolio. For example, you may be too heavily invested in a few shares or sectors that are quite closely related, or have a positive correlation. These shares or sectors are likely to have a tendency to experience similar rises or falls in price.
Your margin account could be used to add positions in other shares or asset classes (forex, indices, commodities and treasuries) that are negatively correlated. This means that when some shares in a portfolio are losing money, other non-correlated shares are likely to be gaining or will not move at all. This can potentially reduce losses and would improve your portfolio diversification.
It is also possible to hedge your existing portfolio through margin trading. For example, let’s say you hold a long position in the underlying market for a particular stock or commodity. In the event these prices start to fall in the short term, you could consider hedging the downside risk without closing out your trade. To do this, you could use your margin account to short sell the same stock or commodity and safeguard your underlying position against short-term falls.