What is margin trading?
You may notice the phrase "margin trading" quite often in the financial world. It comes from the word margin – the pledge, which trader provides to the broker for the financial operation. Margin could be different, depending on the type of the asset and the broker's conditions. For example, for some liquid assets margin may be only 1–2%. This means, that in order to purchase this asset you ought to provide only 1–2% from its value, and the rest of the funds will be added by the broker.
There is another phrase that is closely related to the margin trading – the leverage. Leverage is the instrument that allows you trade with the sums that exceed your funds considerably. Usually, the size of the leverage is 1:100–1:2000, depends on the type of the chosen account in our company. You can learn more details in the page "Trading Terms". Each dollar that you deposit, JustForex will multiply in 100–2000 times, thereby increasing the price and the potential of your operations.
Leverage is the instrument that allows you trade with the sums that exceed your funds considerably.
For example, to buy 1 lot of USD/CHF, trader needs the sum of 100 000 USD. Not many beginners can afford for themselves such starting capital. So this is when leverage can save the situation. Let’s imagine that the trade has chosen Classic trading account with the leverage 1:1000. It turns out that minimal sum to buy 1 lot is 100 000/1000=100 USD. You need only 100 USD to buy 1 lot of USD/CHF.
If the trader enters into the buy order with 1 lot and at a price 1.3600 and closes it at a price 1.3610, this means that his earnings is 10 points or 100 USD.* This means that the trade has increased his capital on 100% and now it is 200 USD.
In case there is no leverage, trader needs to have 1000 USD to open the order of 0.01 lots. Wherein, the earnings with the same circumstances will only be 10%.
Trader from the beginning adjusts his trading strategy specifically for the chosen conditions, which allows to use leverage with benefit and to increase potential earnings.
This is a great solution for the traders with small initial investments, and in case of the favorable conditions will allow him to increase the capital faster.
* You should take into consideration the size of the spread at the moment.