Video: What is margin and what is it for?
2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:48
Practically anyone, even someone who has never been involved in stock trading, must have come across such a concept as margin. But at the same time, not everyone asked the question: “What is a margin?” This word, equally translated from English ("Margin") and French ("Marge") and denoting the edge or margin of the page, introduces a special term that has become widespread in insurance and banking, as well as in trade (including stock exchange).
In its classic sense, margin is the difference between the price of a product (its cost) and the purchase or sale price. In other words, it is nothing more than the profit received by bidders due to the difference in the purchase or sale price of any material assets or securities, including currency. Depending on the scope, the margin can be credit, bank, guaranteed or maintained. To assess the profitability of the turnover of enterprises from an economic point of view, there is such a thing as a commercial margin, which is usually expressed as a percentage.
A slightly different meaning is attached to thisterm in the Forex market. Those who were interested in trading on the difference in currencies have probably come across this concept more than once. So what is Forex margin? In this case, it is a deposit or, more precisely, a pledge required to open a position in the foreign exchange market. Or, in other words, part of the funds on the trader's account used as a security deposit. For a currency trader, it is important not only to know what margin is, but also to be able to calculate it. The amount of margin directly depends on the size of the lot and on the leverage. For direct quotes, you need to divide the lot size by the leverage. For example, if you have a leverage of 1:200 and trade a lot of 10,000 USD, the margin will be 10,000 / 200=200 USD. If the personal account is $1,000, then the trader has $800 at his disposal, and $200 is frozen, being a pledge to cover losses if the trade did not go in the direction he expected. This is what margin is in the Forex market.
Margin trading is attractive both for dealing centers that provide this service and for investors themselves, since it allows you to open positions for an amount several times greater than the size of the deposit. For example, having only $100 on your account with a leverage of 1:50, you can already trade $5,000. It should be noted here that too much leverage not only significantly increases your buying power, but also involves increased risks and can literally destroy your account, since when trading with a large leverage, not only increasesprofits but also losses. To prevent this from happening, in case of a lack of funds to maintain the current open position, the trader receives a "margin call" (margin call) - a kind of notification about the need to deposit additional funds to maintain an open position, otherwise it is forced to close - the so-called " stop out" (stop out).
Only a proper understanding of what is leverage and what is margin can increase the profitability of trading with the lowest possible risks.
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