Do you Know what is Margin Trading: Part - 2?

As I have already mentioned margin trades do not require from investor the whole sum of trading contract.

When investors want to make a trading operation, they deposit a certain sum, which depends upon the total size of the trading contract, and crediting conditions set up by brokerage firms.

When the brokerage firm provides the leverage of 1:100, this means that the investor has to pay the pledge of $1,000 for trading $100,000.

The pledge secures brokerage firms from possible trading losses on FOREX.

Margin trading is very popular because it is easily affordable to average investors. Investing ones capital for getting fixed income from securities foreign countries can hardly bring high profits. No one would dare to doubt that US exchequer bonds are stable and reliable, but they are expensive and give low 

revenue (about 6% annually); that is why they are regarded as long-term investments. Shares can give higher income, however the size of dividends strongly depends upon successful (or not) activity of the company and the favors of shareholders.

 Share purchasing for speculating for the rise of the shares is considered to be more interesting and profitable, but it requires large volumes of investments.

Margin trades do not have these restrictions: you can buy and sell whenever you wish and you will need 0.2-10% from the total size of trading contract.

Read More

Do you Know what is Margin Trading: Part - 1?

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.

Read More