If you are buying on margin in the world of Forex trading, what you are really doing is something called margin trading. In other words, you are trading currencies with borrowed and short-term capital when you are buying on margin. Another term for buying on margin is trading on margin.
It follows then that you can just look at margin as a type of borrowed money or just even debt. With this borrowed money or debt, you as the forex trader have the opportunity to purchase a lot more currency than you would ordinarily have the power to purchase. Of course, the noted exception would be if you were super-wealthy and therefore had a reserve stock of hundreds and hundreds of thousands of dollars!
Buying on margin, and what is a lot?
Lot is a term you probably will only become familiar with once you begin trading on the forex market. Lot is a term that stands for the way in which currencies get traded within the forex market. As an example, the standard lot is normally worth around $100,000, and this has to do with the fact that the forex market is a market that is greatly leveraged.
The term lot is simply nothing more than a reference to the minimum quantity of currency that has to be bought in your basic transaction. To allow your average forex trader the opportunity to get to this particular quantity of currency, a broker is going to present said forex trader with buying on margin or margin trading options. In essence, this carries a few different implications and scenarios for the concerned forex trader.
For one, the forex trader who will be buying on margin is going to be capable of executing certain deals with just a moderate quantity of trading capital, and this will be accomplished handily through one’s margin account. For example, with as little money as just $50 or even $1000, it will be possible for the forex trader to open up positions of $10,000 or $100,000. The fact of the matter with forex trading is that trading in small quantities of money is useless and pointless since one can only make tidy profits when trading in large sums of money!
Collateral!
Another thing about buying on margin is that the brokers will routinely utilize your forex margin as a form of collateral. They will utilize this margin as a safeguard with which to cover any losses that are incurred by the forex trader. You see, within margin trading, nothing is actually ever really purchased or sold for any delivery.
All that the funds within your trading account do is actually serve as a margin necessity. Of course, based upon which specific forex broker you end up utilizing, the prerequisites for your margin will be different. Some good brokers can even offer margin requirements that are as low as 0.5 percent, which is quite good, to say the least.
Buying on margin example
Let’s say that market indicators are informing you that the Euro will be getting stronger in comparison to the U.S. Dollar. You begin thinking that it’s the perfect time to purchase EUR/USD so you open up a position of 100,000 pounds to buy Euros, using a 1 percent margin at a cost of 1.352, wishing the price to go up! All this means is you are now holding 100,000 worth of Euros at an original deposit of 1000 pounds.
Let’s say the price goes up to 1.357, and you thus choose to sell and close the position. You just got $500, which is equal to 368 pounds, representing a 37 percent return on your original capital investment of 1000 pounds. As a result of these maneuvers, you now possess some 1370 pounds within your forex account.
If you are buying on margin, it is obvious that you get to have a lot more buying power, and the chances of making more money increase, too.
