Forex trading involves risk. Losses can exceed deposits

Margin definition

Forex trading involves risk. Losses can exceed deposits

What is a margin?

Margin is the amount of money needed to open a leveraged trading position. It is the difference between the full value of your position and the funds being lent to you by a broker or leverage provider.

There are two types of margin to consider when you're trading: initial margin and maintenance margin. The initial margin is the deposit required to open the position, often called the deposit margin or just the deposit. Once you have opened your position, you might need to add more money if your trade starts to incur a loss and your deposit margin is no longer enough to keep the position open. If this happens, your provider will place you on margin call, and you'll be required to top up the funds in your account - this additional capital is known as the maintenance margin.

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Example of margin

Say, for instance that you wanted to purchase $1000 worth of shares of company ABC. If you were to buy the shares through a traditional broker, you'd need to pay the full $1000 up front to own them. However, if you decide to trade on margin, you'd only need a fraction of this cost up front. If your provider requires 20% of the position to be put forwards as margin, then the initial amount needed for the trade would be $200.

Pros and cons of margin

Pros of margin

Margin can magnify your profits, as any gains on your position are calculated from the full exposure of the trade, not just the margin you put up as deposit. Buying on margin means that you have the potential to spread your capital even further, as you can diversify over a wider array of positions.

Unlike unleveraged products, trading on margin enables you to go short on markets - so you can profit from markets that are falling price, as well as rising.

Cons of margin

Although margin can magnify profits, it can also magnify losses if the market moves against you. This is because your loss is calculated from the full value of the position, not just the margin. However, there are steps that can be taken to mitigate the negative side of margin, such as implementing a risk management strategy.

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