Understanding the relationship between margin and leverage is important when you start to make your calculations and begin trading. To be successful and understand what you are doing during open positions, you need to know what the terminology is and how to read the ratios associated. Margin is the initial deposit that opens the account and is unrelated to any additional fees or costs. This number is a specific amount and is the collateral. It is specifically used to generate the leverage needed. Margins are often preset, so you know what you need and where you can go once you open the account and begin the trading.
You can really increase your positions using leverage. Based upon the amount of margin you have; the leverage is your purchasing power and is manipulated based upon that number. The higher the margin, the more power to trade is available to you. In fact, leverage can give you the flexibility to trade positions in your trading account and do so at a larger amount than what is actually available. The expression of good faith is used quite often in leverage, and it is a securities margin trade where the remaining costs are covered by your broker.
To know how much leverage you have, you must know the leverage ratio, which is represented as X:1. For example, making just one trade without margin, you may need $50k in the account. Based upon a 1 percent margin requirement, the leverage on it is 50:1 for that particular account. Once you know what the leverage ratio is, you can determine the margin requirement. This is 1 divided by the leverage ratio, or 1/ 50:1.
In almost all cases, these ratios will be set prematurely, so you know based upon how much you are trading, your margin, and how much leverage you can maximize during the trade. Your required margin associated with the trade is the actual amount that is required to be put up. On a $100k position, a 5 percent margin means that $5,000 is required to open.
Differences Between Securities Margin and Forex Margin
The term margin is one that is used interchangeably between financial markets. When you make these purchases on margins, you are basically agreeing to pay these obligations and making a deposit with collateral. When you make these purchases and trades on what is essentially borrowed money, then you are using the securities margin. This money is basically a loan from your broker since they have the difference to cover.
When it comes to forex margins, your margin is strictly deposited money that you have on hand and keep while your platform is openly trading, and you have an open position. There are no borrowed funds or loaned margins since there is no actual purchase happening. In these instances, the contract to purchase is up for trade or sale, so there is no need to take a loan from your broker.
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