<Last updated 16.04.2020>
Hi! If you are interested in online trading you should read the below that provides important information about what it means to trade with leverage and how this affects margin requirements.
Online Trading Platforms allow trading in lots. The contract size refers to 1 lot. So for example, 1 lot EURUSD will be 100,000 units of EUR > these 100,000 is the contract size.
Lot: A unit of measurement regarding the position size, like a share in Equities, or a contract in Futures.
Lot can be referred to as the number of currency units (size) you will buy or sell.
Using leverage allows you to increase potential profits but also losses. With a small amount of capital in your account , you can trade much bigger volumes than you would normally could.
Traders can trade on a highly leverage basis most commonly at 50:1 (it means controlling positions 50 times higher than their own funds).
Example with Original Funds = 10,000:
Trader wants to Buy 100,000 EURUSD (100K EUR). Leverage: 1:50
So Margin Required = 100K / 50 = 2,000 EUR only for a long position of 100,000 EUR.
> A price change leads to larger profits/losses since amount bought is higher.
Margin Requirement is the deposit required to open or maintain a position. Brokers typically will allow a 50:1 leverage. This means that the margin/funds required to open a position will be lower 50 times, the margin that would normally be required. Margin is then calculated by taking the contract size divided by 50.
Example:1/50 Leverage => Margin Requirement 0.02 or 2%.
So 2% x 100,000 (1 lot EURUSD) = 2,000 margin required for opening a position (in EUR/base currency)
What is the difference between the Forex/CFD Margin vs. Securities Margin?
In the securities world, margin is the money you borrow as a partial down payment, usually up to 50% of the purchase price, to buy and own a stock, bond or ETF “buying on margin” a loan from the brokerage firm. In Forex (CFD trading – It is NOT a down payment, and you do NOT own the underlying currency pair.
Margin can be looked at as a good faith deposit or collateral that’s used to ensure each party (buyer and seller) can meet their obligations of the agreement.
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