The most significant advantage of margin trading is to use leverage to increase investment returns. Here is an example:
Suppose you have $10,000 in cash, and the market price of a stock is $100, with a margin of 50%. You can buy 100 shares with your own cash, and borrow another $10,000 from Futu to buy another 100 shares, with the shares you previously bought as collateral. Now you hold 200 shares ($100 per share) through margin trading, and the market value of your position is $20,000.
When the stock price rises by 50% to $150 per share, the market value of your position becomes $30,000. Since the funds you borrowed from Futu remain unchanged at $10,000, your equity rises to $20,000.
Short selling is a strategy commonly used when you believe the price of a stock is about to fall. For short selling, you do not own the stock yourself; instead, you need to borrow it from a brokerage and sell it. When the stock price falls, you buy back the stock and return it to the brokerage, thus earning the spread. Here is another example:
Suppose the market price of a stock is $100 per share, and you think the stock price will fall in the future. You first borrow 100 shares of the stock from a brokerage and sell them. Now you have $10,000 in cash due to the sale, while the number of shares becomes -100. After a period of time, the stock price drops to $50 per share. Now you only need to spend $5,000 buying 100 shares of the stock and return them to the brokerage. The remaining $5,000 is your return on short selling.
The margin financing and securities lending business involves various risks, and security prices may sometimes be highly volatile. If the market situation is unfavorable to your position, you may need to provide additional margin, and there is also a possibility of losses exceeding the invested capital. Therefore, investors must carefully consider whether such financing is suitable for their financial situation and investment objectives, and make investment decisions prudently.