Understand the Concept of leverage and Margin
When it comes to Forex trading one should take into consideration that this two are extremely vital concepts: the leverage and the margin. It is so, as these concepts easily cause worries, in case they are not used correctly. Both the terms “leverage” and “margin” are related to the same idea but in different instances.This is important to Understand the Concept of leverage and Margin.
Concept of Leverage
When we refer to leverage, we mean the use of borrowed capital to expand the potential return on investment we intend to make. It favors both the investor and the firm to invest or operate. What is worth noting, however, is that leverage is always related to a higher level of the risk. If the investor decides to rely on leverage losses may appear to be far larger than they would have been if the investment had been leveraged. Therefore, it is useful to say that leverage amplifies both profits and losses.
Concept of Margin
If a trader is willing to enter into the trades with the use of borrowed money, then he/she will need to make a deposit, which represents the specific portion of the actual value of the trade. Its deposit is referred to as a requirement for margin or a good faith deposit. What is specific here is, that in most cases investors will be able to withdraw the whole amount of the deposit, if they decide to get out of the trade.
Now it is the time to reveal another crucial moment in the margin trading. If strategy a trader follows, does not work and the trader starts to lose the money, he/she may eventually come to the point, when a specific portion of the deposit may be lost. The trader experiences the so-called margin call. That is a situation when their margins fall below 50%. In case a margin call occurs, the broker requires the customer to deposit an additional amount of money so that the account is recovered to or above the minimum maintenance margin, which allows the client to continue trading. It is insurance for the broker that the trader would eventually pay his/her debt. So,This is important to Understand the Concept of leverage and Margin.
An Example: In Forex, a trader may enter into trades up to $100,000 with a small $1,000 set aside. In this case, the leverage is 1:100. The $1,000 that the trader deposited into the account is estimated as the initial margin. This is what the trader had to give up to engage in the market.
Remember, your margin is the money you give to the broker as a deposit of good faith. The forex broker requires these margins from everyone and puts them together to make huge trades on the interbank network. The actual profit or loss you register in the market is dependent on the size of trade you entered and not on the amount of margin required. the terms “leverage” and “margin” are related to the same idea but in different instances.This is important to Understand the Concept of leverage and Margin.