Trading on the Internet does not always involve buying or selling a real product. In particular, this applies to trading on currency exchanges, where, by buying or selling foreign exchange contracts, traders earn on exchange differences. To conduct speculative transactions in the Forex market, there is no need for large financial investments.
Any currency transaction is carried out on the basis of short lending. The security that the trader provides in this case is called margin. Margin credit differs from simple credit in its size, which exceeds the margin by several times.
Margin trading is the execution of transactions for the sale of currency (assets) using a virtual loan, which is provided to a trader on the security of a previously agreed amount (margin) placed on a deposit with a brokerage firm.
The ratio between the funds that a trader receives in a loan at a dealing center and his own is called leverage. The marginal transaction due to the effect of the financial “leverage” (leverage) allows you to receive income significantly exceeding that which could be obtained using only your own funds.
Margin trading allows, in the presence of profit, to increase it both in an increasing and decreasing market. An operation is considered completed if two mutually completing transactions are completed: for example, if a certain volume of a certain currency was purchased (opening a position), then the trader should sell it completely after a while (closing the position), and vice versa. The final result of closing a position is the difference between the purchase and sale prices. At the same time, the result of the closed transaction is added to the released pledge margin: with a positive balance, the amount in the trader's account will exceed the pledge, otherwise the transaction loss will be deducted from the pledge.
Naturally, transactions are not always successful, but practically the most that a trader risks is his deposit. The broker controls not only the conclusion of the transaction, but also accompanies it. If the loss on it approaches the critical, the trader receives a notification about the need to increase the size of the collateral, the so-called margin call (in translation - the requirement for margin).
Margin trading, thus, gives traders not only the ability to manage profits by increasing their deposits, but also limits their risk of losses.
The main difference between a margin transaction and operations using a regular loan is in the absence of any funds that a broker needs to deposit for using a loan. Moreover, the trader's risk is limited to the funds deposited by him into the broker's accounts. This means that if the broker does not have time to close the margin call transaction and its loss exceeds the margin, i.e. the size of the collateral, then the broker himself incurs losses.
Margin trading implies only the right of the trader to dispose of specific assets, that is, to buy or sell. Usually this is enough for speculative operations, because the trader is only interested in the difference in the price of the goods, and not he. It must be admitted that such trade, which does not require a real supply of goods, leads to a significant reduction in the overhead costs of traders.
The use of leverage increases the trading capital of the trader. Even if the trader has only 1% of the contract size on his account, this method will still allow him to earn on the difference in exchange rates.
Margin trading contributes to a sharp increase in the volume of operations in the market. Although risks increase as a result, but with the increase in transaction volumes the nature of the market changes, it becomes more liquid.