Almost any person, even one who has never been involved in exchange trading, has probably come across such a thing as margin. But at the same time, not everyone asked the question: “What is margin?” With this word, equally translated from English (“Margin”) and French (“Marge”) and indicating the edge or field of a page, a special term is introduced, which is widely used in insurance and banking, as well as in trade (including exchange).
In its classical 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 but profit received by bidders due to the difference in the purchase or sale price of any tangible assets or securities, including currency. Depending on the scope, the margin may be credit, banking, guaranteed or supported. To assess the profitability of the turnover of enterprises from an economic point of view, there is such a thing as commercial margin, which is usually expressed as a percentage.
A slightly different meaning is given to this term 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 in the trader’s account used as a guarantee deposit. For a currency trader, it is important not only to know what margin is, but also to be able to calculate it. The margin value directly depends on the lot size and leverage. For direct quotes, it is necessary to divide the lot size by leverage. Suppose, 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 $ 1000, then the trader has $ 800 at his disposal, and $ 200 is frozen, being a pledge to cover losses, if the transaction went in the wrong direction, which he expected. This is what Forex Margin is.
Margin trading is attractive both for dealing centers providing this service and for investors themselves, since it allows you to open positions for an amount several times the size of the deposit. For example, having only $ 100 on your account with a leverage of 1:50, you can already trade in the amount of $ 5000. It should be noted here that too much leverage not only significantly increases purchasing power, but also carries increased risks and can literally destroy your account, since when trading with large leverage, not only profit but also loss increases. To prevent this from happening, in the case of a shortage of funds to maintain the current open position, the trader receives a “margin call” - a kind of notification about the need to make additional funds to maintain an open position, otherwise it is forcibly closed - the so-called " stop out "(stop out).
Only a correct understanding of what leverage is and what is margin can increase the profitability of trading with the lowest possible risks.