What is margin on forex and stock exchange or broker's margin
Recently, trading on the stock exchange has become especially attractive precisely thanks to margin trading; the use of leverage can significantly increase the funds at the trader’s disposal.
In order to understand the whole essence of the process, you should understand what margin is on Forex or on another financial, commodity exchange.
Broker margin is the amount of funds that a broker provides to a trader as a loan for trading on a currency, commodity or stock exchange.
These funds cannot be used for other purposes or simply withdrawn outside the brokerage company; they are a targeted loan that can only be used to conduct an exchange transaction.
For example, deposit size is $1,000, margin leverage is 1:10 – the available capital for trading in this case is 10,000. That is, in this case the broker’s exchange margin will be $9,000.
If we change the leverage to 1:50 and leave the deposit the same, then we will already have $50,000 at our disposal. In this case, the broker's margin will increase to $49,000.
Some aspects of using broker margin when trading Forex
When using money from a brokerage company, many traders have a question: what will happen if I lose this money, will I have to cover the broker’s losses? Fortunately, home-based incidents practically never occur in practice due to the specifics of the organization of the process.
The collateral for margin trading is solely the trader’s funds, so it is not possible unless a margin account has been opened and funds have not been transferred to it.
In this case, the broker’s margin plays only an auxiliary role, and all losses resulting from the transaction lie exclusively on the client’s deposit and cannot exceed its size.
For example , the deposit amount is 1000, the leverage is 1:100, the transaction amount is 100,000, in this case the transaction will be closed as soon as the losses on the operation reach $1,000.
In practice, in order to protect its own funds, a broker usually reinsures itself and closes unprofitable operations when the amount of losses is no more than 10% of the Forex collateral . That is, if you have 1000 on deposit, the broker will forcibly close the transaction with a loss of 900 dollars.
Broker margin when trading Forex has undeniable advantages, but its use is also not without disadvantages, the main of which is the risk of losing the entire amount of funds and a sharp increase in unprofitability of operations.
If, when trading only with your own funds, the amount of losses is equal to an unfavorable change in the value of the asset, then with the use of borrowed funds it increases in proportion to the margin leverage.
For example , there is a deposit of $2,000, and the leverage is 1:1; a buy transaction is opened, but contrary to expectations, the price of the currency fell by 1%, in this case the loss on the transaction will be $20.
In the second option, we use a leverage of 1:50, and accordingly increase the transaction volume by 50 times. Now a 1% change in the exchange rate will cause a loss on a deposit of $1,000.
When using margin on Forex, not only losses increase, but also the resulting profit, which is why margin trading is so popular.
Currently, brokerage companies provide quite different amounts of leverage; the broker's margin depends both on the company itself and on the asset being traded.
Companies licensed by the Central Bank of Russia provide leverage of no more than 1:50, foreign brokers are more free in this regard and the maximum margin for Forex trading can be up to 1:3000.
A list of popular brokerage companies can be found on the page - https://time-forex.com/spisok-brokerov