For attracting to FOREX investors who can trade with sums of
several thousands USD in 1986 was introduced the mechanism of “margin trading”.
The essence of this mechanism lies in pledging a certain sum
by the investor and getting the possibility to manage lager credit; these
credits are protected from speculative currency trades’ losses with the sum of
investor’s pledge.
When investors decide to trade on FOREX, they conclude
contracts with brokerage firms or dealing centers. Usually the company
providing its services to the investor acts on the instructions of its client,
but on behalf of the company and using the company’s funds for arbitrary
operations.
The banks, where the brokerage firms have their accounts, in
a quickly manner provide firms with credits from 10 to 500 compared to the
account sum.
In other words, this credit functions as leverage for the
trades. The credit can be used for specific a reason only, which is for FOREX
trading in our situation.
This kind of credits is very profitable for banks: they
fully control funds movement and get
considerable income from buy/sell currency
rates difference. On top of this, banks often charge certain percentage for
providing these credits.
The brokerage firms also get their part of pie: they get
profit from buy/sell currency rates difference and charge commissions for
providing their services to investors.
That is why the “burden of responsibility” for margin
trading comes up to the investors only.
When investors wish to make buy/sell operation on FOREX,
they give direct orders to their brokerage firms.
This order should include the sum of trading contract.
The trades are made in fixed volumes called “lots”. Usually
the size of one lot is equal to $100,000.
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