Principle of Margin Trading
Just recently, only participants that had millions of
dollars traded on the FOREX market. The market was inaccessible for many
private investors owing to the necessity to have big initial capital. The
situation drastically changed when the principle of margin trading was
developed and started to be implemented. Due to that, FOREX became accessible
to practically everyone who wants to trade currencies and has only small sums
of money.
The principle of margin trading is based on the fact that
brokers (dealing centres, banks) that provide end customers with an access to
the market extend an automatic credit for the period of transaction. The small
amount of money the customer has serves as collateral. Crediting is called
leverage. Its value can range widely, from 1:1 to 1:400, which provides an
opportunity for the customer to buy/sell some currency for an amount that
exceeds the collateral 400 times!
For example, after choosing the 1:200 leverage for the
trading account and crediting the collateral amount of USD 1,000.00 to the
deposit, the trader has an opportunity to buy currency for the amount of
USD200,000.00, which is 200 times (!) higher than the collateral.
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