What is margin and what is it for?

Almost any person, even one who nevernot engaged in exchange trading, certainly met such a thing as margin. However, not everyone asked himself the question: "What is margin?" This word, equally translated from English ("Margin") and French ("Marge") language and denoting the edge or field of the page, introduces a special term, insurance and banking activities, as well as in trade (including exchange trading).

In its classic understanding, the margin representsthe difference between the price of the product (its cost price) and the price of purchase or sale. In other words, this is nothing more than the profit received by bidders due to the difference in the price of buying or selling any tangible assets or securities, including currency. Depending on the scope of application, the margin can be credit, bank, guaranteed or supported. To assess the profitability of the turnover of enterprises from an economic point of view, there is such a thing as commercial margin, which is usually expressed in percent.

A somewhat different meaning is attached to this termin the Forex market. Those who were interested in trading on the difference in currencies, for sure, often met with this concept. So, what is Forex margin? In this case, it is a deposit or, more precisely, a pledge required to open a position in the foreign exchange market. Or, in other words, part of the funds on the trader's account used as a security deposit. For a currency trader, it is important not only to know what margin is, but also to be able to calculate it. The amount of margin directly depends on the size of the lot and on the leverage. For direct quotations, it is necessary to divide the amount of the lot into a leverage. Suppose, if you have a leverage of 1: 200 and trade a lot at 10,000 USD, the margin will be equal to 10000/200 = 200 USD. If the personal account is $ 1000, then the trader has at his disposal $ 800, and $ 200 is frozen, being a pledge to cover losses if the transaction went not in the direction that he was counting on. That's what the margin on the Forex market is.

Margin trading is attractive andfor dealing centers that perform this service, and for investors themselves, since it allows you to open positions for an amount several times exceeding the size of the deposit. For example, having only $ 100 on your account with a leverage of 1:50, you can already trade $ 5,000. It should be noted that too much leverage not only significantly increases the purchasing power, but also involves increased risks and is capable of literally destroying your account, since when trading with a large shoulder, not only profits but also losses increase. To prevent this from happening, in case of lack of funds to maintain the current open position, the trader receives a "margin call" - a kind of notification about the need to make additional funds to save the open position, otherwise it forces her to close - the so-called " stop out ".

Only a correct understanding of what a leverage is and what a margin is, can improve the profitability of trade with the minimum possible risks.