Now, let’s say you open a trade worth $50,000 with the same trading account size and leverage ratio. Your required margin for this trade would be $500 (1% of your position size), and your free margin would now also amount to $500. In other words, you could withstand a negative price fluctuation of $500 until your free margin falls to zero and causes a margin call. Your position size of $50,000 could only fall to $49,500 – this would be the largest loss your trading account could withstand.
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For securities, the definition of margin includes three important concepts: the Margin Loan, the Margin Deposit and the Margin Requirement. The Margin Loan is the amount of money that an investor borrows from his broker to buy securities. The Margin Deposit is the amount of equity contributed by the investor toward the purchase of securities in a margin account. The Margin Requirement is the minimum amount that a customer must deposit and it is commonly expressed as a percent of the current market value. The Margin Deposit can be greater than or equal to the Margin Requirement. We can express this as an equation:
To get started, investors interested in trading in the forex markets must first sign up with either a regular broker or an online forex discount broker. Once an investor finds a proper broker, a margin account must be set up. A forex margin account is very similar to an equities margin account – the investor is taking a short-term loan from the broker. The loan is equal to the amount of leverage taken on by the investor.
Equity – Your equity is simply the total amount of funds you have in your trading account. Your equity will change and float each time you open a new trading position, in such a way that all your unrealised profits and losses will be added to or deducted from your total equity. For example, if your trading account size is $1,000 and your open positions are $50 in profit, your equity will amount to $1,050.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. Remember, you could sustain a loss of some or all of your initial investment, which means that you should not invest money that you cannot afford to lose. If you have any doubts, it is advisable to seek advice from an independent financial advisor.
So, for an investor who wants to trade $100,000, a 1% margin would mean that $1,000 needs to be deposited into the account. The remaining 99% is provided by the broker. No interest is paid directly on this borrowed amount, but if the investor does not close their position before the delivery date, it will have to be rolled over. In that case, interest may be charged depending on the investor's position (long or short) and the short-term interest rates of the underlying currencies.
A Portfolio Margin account can provide lower margin requirements than a Margin account. However, for a portfolio with concentrated risk, the requirements under Portfolio Margin may be greater than those under Margin, as the true economic risk behind the portfolio may not be adequately accounted for under the static Reg T calculations used for Margin accounts. Customers can compare their current Reg T margin requirements for their portfolio with those current projected under Portfolio Margin rules by clicking the Try PM button from the Account Window in Trader Workstation (demo or customer account).
Trading on margin refers to trading on money borrowed from your broker in order to substantially increase your market exposure. When opening a margin trade, your broker lends you a certain sum of money depending on the leverage ratio used, and allocates a small portion of your trading account as the collateral, or margin for that trade. The remaining funds in your trading account will act as your free margin, which can be used to withstand negative price fluctuations from your existing leveraged positions, or to open new leveraged trades. The relation between your free margin and other important elements of your trading account, such as your balance and equity, will be explained later. For now, it’s important to understand the meaning of margin in Forex.