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Margin
trading
boy

With Margin trading you can trade on a small amount of money.

Trading on margin allows traders to take advantage of tradingopportunities without having to worryabout a huge capitalinvestment to acquire an asset.

Margin trading, on the other hand, entails using leverage toraise risk and potential returns. Marginis usuallyexpressed as a percentage of the size of the forex positions and varies per forex broker. In the forexmarket, a 1%margin is common, meaning that dealers can control $100,000 of currency with just $1,000.

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Calculating
margin
The margin for a forex deal is calculated using a simple method. Simplymultiply the trade size by the margin %. Then,from the remaining equity in your account, remove the margin utilized for all deals. The resulting figureisthe amountof margin you have remaining.
Calculating marging example

Example

Suppose you want to borrow $30,000 to buy a stockthat you intend to hold for a period of10 days where the margininterest rate is 6% annually.

1
To figure out how much it will cost youto borrow money, multiply the amount you want to borrow by the rate you’ll be charged:
$30,000 x .06 (6%) = $1,800
2
Then divide the result by the number of days in a year to get thetotal. Rather from the expected 365 days, thebrokerage sector typically employs 360 days.
$1,800 / 360 = 5
3
Multiply this figure by the total number of days you’ve borrowed orexpect to borrow the money on margin:
5 x 10 = $50
In this case, borrowing $30,000 for 10days willcostyou $50 in margin interest.

While margin can be used to increase profits if the price ofyour investment rises and you make aLeveraged purchase, itcan also increase losses if the price of your investment falls, resulting in a margin call, or the needto add more cash to your account to cover those paper losses.

Remember that whether you profit or lose on a trade, you willstill owe the same margin interest as theoriginaltransaction.

Final
thoughts

Trading on margin is a riskybusiness, but can be profitable if managedproperly, and more importantly, if a trader doesnot overleverage themself. It also makes accessing certain asset values easier as a trader doesn’t needto put up thetotal cost of an asset when they see an interesting trading opportunity. When entering a trade onmargin, it’s importantto calculate the borrowing cost to determine what the true cost of the trade will be, which willaccurately depict theprofit or loss.
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