Leverage trading, or margin lending. Margin trading features

All traders who speculate in the financial markets use a trading account in which transactions occur. Under the terms of brokerage companies, they have margin lending. All financial transactions made by speculators occur using leverage. What is margin, in simple words - lending for trading? This, as well as its features and rules of use will be discussed in the article.

Concept of margin

In trading on financial markets, loans with margin conditions are provided by brokerage companies to all clients without exception. This allows speculators to engage in trading on more favorable terms. What is margin? In simple words - this is a special type of loan for trading in financial markets. This type of provision of additional funds allows customers to use trading assets with financial leverage. That is, a trader can make transactions on more favorable terms with an excess of their own deposit money.

With the help of leverage, the speculator has the opportunity to use additional funds in his transactions that a brokerage company provides him. It has its own parameters and conditions for each trading account, the most important of which is the issuance of a loan against the trader’s own deposit funds in his account.

Leverage

When a client in a brokerage company passes registration and prepares an account for work, he can choose for himself the most suitable option for him (Standard, VIP, Micro and other types). Most often it depends on the free amount of money that the speculator is willing to risk, that is, on his deposit.

Leverage is the ratio of the total amount of money in a trading account to the lot volume. Usually, these conditions are specified in the contract, but there are brokers that allow customers to choose them on their own.

Types of leverage:

• 1:10;
• 1:25;
• 1:50;
• 1: 100;
• 1: 200;
• 1: 500;
• 1: 1000 and other options.

The higher this indicator, the more opportunities a trader has in speculative operations. But it is also necessary to pay attention that financial risks are increasing. Therefore, when choosing the type of trading account, you need to consider that trading with a large leverage in case of unsuccessful trading will quickly lead the speculator to Margin Call, that is, the loss of most of the deposit.

The essence of margin trading

At Forex, as in other areas of financial market trading, there are no actual sales. When they say that traders buy or sell any assets, in fact this does not happen, since all transactions are based only on forecasting changes in market quotes. In trading, they make money on assumptions that can be determined by many price change tools. The trader’s income consists of speculative transactions and is calculated on the difference between the purchase and sale of an asset.

The essence of the margin principle is exchange operations with trading instruments, without actual sales or purchases. All transactions occur through arbitration. For clarity, you can consider an example. The speculator selects a trading asset and places a buy order. Another trader on the same tool opens a sell position. The volume of lots should be the same. After some time, an exchange occurs. As a result, one speculator makes a profit, and the other a loss. Earnings of the first trader will depend on the volume of the lot and the number of points earned.

Margin lending allows traders to significantly increase income. This is due to the ability to exhibit large volumes, which are calculated in lots. Suppose a deal with one whole lot will be 10 cents per point on a micro-account, in standard cases this amount will increase 100 times - up to 10 dollars with lot volumes of 0.1 - 1 cent or 1 dollar for standard types.

Margin Trading Features

The loan issued by brokerage companies differs significantly in terms of conditions from all other loan options. Consider its features:

1. Credit funds are issued only for trading. They can not be used for other needs.
2. Additional amounts are intended for trading only with the broker who issued them. In exchange trading, including Forex, having registered an account with one dealer, it is impossible to use deposit funds in working with another broker.
3. Margin credit is always much more than the trader’s own funds, in contrast to consumer, bank and other types of loans. That is, it is several times larger than the amount of the collateral or margin.

The margin lending regime significantly increases the total volume of transactions. For example, at Forex, the size of one whole standard lot is 100 thousand. e., or US dollars. Naturally, not every speculator has the necessary amount of money to make transactions. Even average market participants cannot afford such large deposits with high financial risks, from which there can be no insurance, only their minimization.

Margin lending allowed even small market participants to participate in trading through brokerage companies and earn money using leverage. As a result, the total volume of operations has increased significantly.

How to calculate margin?

In stock trading, collateral or margin options are very important. When choosing a trading account, it is always necessary to take into account the size of leverage and the percentage ratio for Margin Call, that is, the level of residual funds until the transaction is forcibly closed by a brokerage company.

Depending on the conditions for obtaining a margin loan, this indicator may be different. Somewhere it is 30%, while other brokers -0% or less. The higher this indicator, which is also called Stop Out, the fewer trading opportunities will be, but if the transaction is closed in a forced manner, the loss will be significantly lower.

For example, a trader’s trading account has a deposit of 1 thousand dollars. If the position is incorrectly opened, when the market went against his transaction, it will be closed at Stop Out at 30 percent, when the speculator receives a loss of 70%, that is, $ 700, and after executing Margin Call, $ 300 will remain on his deposit. If Stop Out under the trading conditions of the account is 10%, in this case the loss will be $ 900, and only $ 100 will remain.

The formula for calculating the margin is as follows: the margin will correspond to the lot size divided by the size of the leverage.

Variation Margin

What it is? Any transaction, no matter how it was closed - with profit or loss, is displayed in the statistics of the trader in his trading terminal. The difference between these indicators is called variation margin. Each brokerage company sets a limit, that is, a minimum value on speculative deposit funds. If the level of variation margin in the trade falls below such parameters, then the broker's client will be considered bankrupt, and his funds will be debited from the deposit account.

To exclude possible financial losses, brokerage organizations establish special levels on customers' trading accounts, upon reaching which Margin Call will follow. In trading terminals, a warning from the broker is displayed that the deposit reaches the minimum balance line. In this case, the trader has only one option - to replenish his trading account or it will be closed forcibly with a loss. Margin lending provides a range of this level within 20-30% of the cash collateral.

If the client does not replenish his account, then his balance will decrease, and in this case, all positions, if there are several, will be closed at Stop Out, regardless of the trader’s desire. In other words, to reduce the balance on the trading account and the balance of the deposit by 20-30%, the broker issues a warning to the client - an offer (Margin Call). And then, when losses have reached large values, and only 10-20% will remain in the pledge, but the deposit will not be replenished, it closes the deal - Stop Out by force.

Stop Out Example

How is the forced closure of positions? In practice, it looks like this:

1. Suppose a speculator has a trading account from the Standard category.
2. The size of his deposit is 5 thousand US dollars.
3. He chose the euro / dollar currency pair as a trading asset.
4. Leverage is 1: 200.
5. The standard lot size for Forex is 100 thousand US dollars, that is, a deposit of 5 thousand dollars multiplied by a leverage of 200.
6. The collateral amount in this example will be 10%, that is, $ 500.
7. He opened only one deal, but incorrectly predicted a change in market quotes, and she began to give him losses.
8. Initially, he received a warning in the terminal - Margin Call, but did not take any action and did not replenish his deposit.
9. The deal was closed at Stop Out with an invoice level of 20% set on trading terms. Losses of the trader in the transaction amounted to 4900 US dollars. Only $ 100 left on deposit.

This example shows how dangerous it is to use a large amount of leverage, and the consequences for a trade deposit. During trading, it is always necessary to monitor the size of the margin and open positions with small lot sizes. The higher the margin funds indicators, the higher the financial risks.

In some brokerage companies, you can disable the margin trading service on your own. In this case, the financial risks at margin lending rates will be maximum and amount to 100%, and the leverage will simply be unavailable.

Margin agreement

All trading conditions on the accounts that broker organizations provide for work are specified in the contracts. Previously, the client views them, gets acquainted with all the points, and only then signs them.

Online, when the trader does not have the opportunity to visit the office of a brokerage company, he gives his consent in the contract automatically when registering a trading account. Of course, there are organizations that send documentation via courier or Russian Post. The form of the contract on margin lending is determined by the trading conditions, which spell out all the requirements and regulations.

Short and long positions

Each speculative transaction has two stages: opening and closing a position. For any trade to be considered complete, a complete transaction cycle is required. That is, a short position must necessarily overlap with a long one, and then it will be closed.

Types of speculative operations:

1. Trading on the upward movement of quotes - the opening of long positions. Such transactions in trading in financial markets are designated as Long, or purchases.
2. Trading on the falling movement of quotes - short positions, that is, sales, or Short.

Due to the margin lending regime, trading in financial markets has gained great popularity not only among large participants, such as central banks, commercial, insurance funds, organizations, companies and enterprises, but also among private traders who do not have large capital.

Small speculators can earn relatively small amounts in trading, and in most cases only 1 to 3% of the total transaction value will be enough. As a result, with the help of margin trading, the total volume of positions increases significantly, and the volatility and liquidity of trading assets increases on exchanges, which leads to a significant increase in cash flow.

All positions opened in Long are characterized by conditions for upward movement of the market. A short (Short) - for the downward. Transactions on purchases and sales can be opened with different time durations. They are distinguished by three types:

1. Short-term positions ranging from a few minutes to 1 day.
2. Medium-term transactions - from a few hours to a week.
3. Long-term positions - may last several months or even years.

In addition to the time period, the trader’s earnings depend on the chosen trading asset. All of them have their own characteristics and characteristics, and the more their liquidity, volatility, supply and demand, the higher the profitability of the speculator.

Positive and negative aspects of margin trading

The greater the leverage of a trader’s trading account, the stronger the financial risks of the transaction. Margin lending provides the following benefits for the speculator:

1. The ability to open a position with a small equity capital.
2. Due to leverage, the trader has advantages in the market and it is possible to perform speculative manipulations in trading using a wide variety of trading strategies.
3. Credit margin is provided in a significantly larger amount of available collateral and increases the ability of deposits by tens and hundreds of times.

The following characteristics can be attributed to negative aspects:

1. Margin trading, increasing market liquidity, increases price fluctuations in asset prices. As a result, it is much more difficult for traders to accurately predict price changes, and they make mistakes when opening positions that lead to losses.
2. The leverage used in margin lending significantly increases the speed for generating income, but at the same time, with an unfavorable option, it has a large impact on losses. That is, with it you can both earn very quickly and lose your deposit funds.

Professionals advise beginners to be very careful in choosing the conditions of a trading account, apply the best option for leverage in trading and pay attention to the characteristics of assets. It should be remembered that volatility can be not only a friend of a trader and allow him to make money quickly, but also an enemy, which leads to instant and significant losses.

Free margin

In any trading terminal, you can see such a parameter as free margin. What it is? Free margin is funds that are not involved in trading and in collateral. That is, this is the difference between the total amount of the deposit balance and the credit margin. It is calculated only in open positions during the validity of the order, but as soon as the speculator closes it, then all the security funds are released, and the total deposit amount is indicated in the terminal.

Free margin during trading helps to determine what opportunities are available to the trader, how many and in what volumes of the lot he can still open deals at the current time.

Conclusion

Margin lending offers great opportunities for earnings on the financial market to medium and small market participants, as well as to private traders. Professionals advise beginners to pay special attention when choosing the type of deposit account to trading conditions and leverage.