Margin accounts enable investors to use a small amount of money to deal in larger volumes. Using a margin account means that a trader essentially borrows funds to further increase the possibility of a higher return on investment. Margin accounts are used by investors with the leverage provided by the borrowed money; this is to make larger trading positions possible. These margin accounts are also used by currency traders dealing in the Forex market.
Simply put, trading on margin means an investor is trading using short-term borrowed capital.
By using a margin account, investors can arrange deals, as well as trade large amounts by using a small amount of capital. For example, if he wants to invest in positions amounting to $10,000 or even $100,000, he can do so using funds as little as $50 or $100.
Starting Margin Accounts
If an investor is interested in trading using a margin account, then he must sign up first with a regular broker, or he can use an online Forex discount broker. After choosing the broker he’ll be dealing with, that’s when the margin account will be set up.
Before the trading process, money should first be deposited into the margin account. The amount will depend on the percentage agreed upon by the broker and the investor. The percentage will usually be around 1 or 2% if the currency units are about 100,000 or more. If the investor deposits 1% for trading, then the remaining 99% will be provided by the broker.
The investor will not be charged interest on his borrowed amount, but if he does not close the position before the agreed delivery date, then the amount will be rolled over, and that’s when interest will be charged, depending on his position.
Brokers of margin accounts use $1000 as security. If the investor he’s dealing with starts to face losses that reach $1000, the broker may initiate margin calls. The broker would either ask the investor to put more money into his account, or just to close the position completely to limit further losses. Some brokers tend to liquidate positions once a margin call is reached.
Risks = Forex
Using margin accounts will help you deal in larger amounts that your capital usually cannot support. Be sure to check all the conditions that come along with margin accounts; seek additional advice if needed. Forex carries a high degree of risk; however, profit will not be made if you’re not ready to deal with that risk.