Margin trading. Risks and opportunities

The principles of margin trading have become the main ones, thanks to which many people have the opportunity to work and earn money in the international currency market Forex, on commodity exchanges, when trading company shares, and so on. But not all beginners and not even every experienced trader understand what margin is in trading.

The confusion is mainly manifested in the terminology, since the general economic term "margin", denotes, in fact, profit, that is, the difference between the cost of goods and the selling price or the cost of purchase and the amount at which the product was sold. In this case, it is said about what a margin in trading is, and this is not at all the same as what a margin is in Forex.

Margin, Markup and Forex

After reading the general economic definition of margin, it might seem that margin and margin are the same thing. In fact, this is not so, and these two most important concepts in economics need to be distinguished, and to know how the margin differs from the markup. The margin determines the level of profit that is formed as the difference between the selling price of the product and its cost. The amount of the margin depends on the degree of competition of the product and many other factors. It may well be over 100%.

Margin shows the profit of the enterprise, which is obtained after the sale of goods, when all expenses incurred are deducted from the resulting amount. Thus, the margin level can never exceed 100%.

If we are talking about such world financial markets, where they trade currencies, securities, and so on, then it will not be superfluous to mean what margin is in Forex. This is where this term reveals the specifics of the work of the largest modern markets. The fact is that he explains the very scheme of functioning of the chain "client - intermediary (broker) - world market", which became possible due to the fact that first margin trading appeared on the stock market in securities, and then on Forex.

The essence of margin trading

So, having figured out which definition is worth paying attention to in order to understand the basic elements of the functioning of the world economy, you need to directly consider, but how is margin trading carried out and what is it? In this case, the margin is the amount of credit funds provided by an intermediary, that is, a broker or a dealing center. Thus, we are talking about a kind of margin lending, during which a trader (the smallest participant) can use large sums of money borrowed from a DC or a broker, providing them with a certain amount of collateral in the form of equity capital.

Equity does not necessarily mean cash. It all depends on the chosen direction for the activity. That is, if we are talking about margin trading on Forex, where the most liquid commodity is traded - currency, then, of course, the broker will accept only the same commodity on collateral - money. On the territory of the Russian Federation, there are three types of deposits with collateral:

dollar;
In Euro;
ruble.

If the broker's client works on the stock market, then during margin trading on the securities market, other similar financial instruments (stocks, bonds, and so on) can act as collateral.

To summarize, we can say that margin trading is a financial activity not only with one's own funds, but also with assets provided by a broker on credit.

Types of margin operations

Margin trading in various financial markets (Forex, stock, etc.) is also called leveraged trading. According to their specifics, several types of such margin operations are distinguished, of which the simplest way is to buy at a low price in order to sell at a higher price. Such a scheme of work is called "long", that is, "long" or "long". From many traders you can often hear other similar names, such as: "go long", "long position" and the like.

Bullish leveraged trading

One of them is "Margin trading with leverage for growth" or as they say: "Bullish long". Such an operation is already a more perfect and effective way of making a profit with a small deposit, where the basis is the presumptive rise in the price, constantly soaring up, as if a victim is being raised by the bull on the horns.

In the basic version, margin trading in the securities market is carried out with your own money. That is, the trader allocates a certain amount for the purchase and works within his account, waiting for the stock or other securities to rise in order to sell them profitably. The obvious disadvantage of this method is the need for large amounts to work effectively.

And, if on the stock market this is not yet strongly reflected, and there you can somehow work and even earn with relatively small volumes of your account, then margin trading on Forex has become that "magic wand", thanks to which small participants generally have an opportunity make money on changes in quotes. The values of a standard lot on Forex are quite large, and, of course, not everyone is ready to risk many tens and hundreds of thousands of dollars at once. This is where brokers come to the rescue, adding the necessary amounts to the trader's funds from their own pocket for comfortable work and making a solid profit. This type of financial transactions is also called: "buy with leverage", "long with margin" and the like.

Bearish trade with leverage

In contrast to bullish sentiment, where traders are pushing the price up, there is leveraged Forex margin trading that expects the value of a currency or stock to fall down. Here they use the term "bear market", that is, those speculators who want to make money on it, move the price down, like a bear pressing the victim to the ground. Thus, financial markets allow their participants to earn both the growth of financial instruments and their fall. That is why, even the economic crisis can be used by a trader in his own interests, gaining considerable profits, while companies or some entire sectors of the economy incur losses.

Usually, a fall in prices occurs in the short term - these are various corrections, reactions to force majeure, and so on. And if the market “long” is growing, then at some certain moments it can demonstrate a very strong downward movement. Margin transactions in this direction will be called "short", or as they are also called: "short trading", "short positions".

In order to better understand how you can make money on a fall, you can consider an example of how margin trading in the stock market is carried out. The trader sells shares while they have a high price. He does not buy these shares himself, but borrows from a broker. Then, after waiting for the price to fall, he buys them for return to the broker, but at a much lower price. The trader retains the difference obtained in the course of such a financial operation.

Leverage and margin

To understand what margin is and how it differs from leverage, you need to consider the definition of these two interrelated phenomena. Leverage is usually expressed in numbers as a ratio. For example, one-to-one leverage (1: 1). What does it mean? If we are talking about margin trading on Forex, then this means that by 50 thousand rubles, which, for example, the trader already has in the account, the broker can give the client the same number of his own for work. In the same situations when 1: 1 leverage is considered in the field of margin trading on the securities market, then for 50 thousand rubles of the client's deposit, the broker can give the number of shares equivalent to the same 50 thousand rubles.

That is, the leverage formula will look like this:

There is one very important point here that you need to know for those who use margin trading to work on stock exchanges. It consists in the following: not all shares are used as collateral for assets.

That is, if the client has a large account, for example, 300 thousand, but of this amount, 100-150 thousand are in shares of the 2nd and 3rd echelons, then the broker can provide a loan only for the free balance of money or those valuable securities that are used as collateral. That is, the broker himself makes an assessment about the number of assets and how they are counted.

Margin and leverage are very interrelated and usually in trading terminals they show just the margin, expressed as a percentage. Using the formula below, you can find out how to calculate the percentage margin:

If assets are taken as 1, then

That is, knowing the margin, you can easily calculate the leverage and vice versa. To make it easier to understand, it is enough to remember that such a percentage value of the margin can be expressed in the form of a ratio of leverage numbers, and in turn, the leverage can be converted into a percentage level of margin.

Dangers of margin lending

Recently, almost all dealing centers have warned their clients against using margin lending, since it is very easy to play around with it. What does this mean and why is the margin so dangerous? The fact is that working in the financial markets is always associated with a certain risk, which leads to the fact that some of the transactions are closed in the negative. This is inevitable, since the market, be it Forex or any stock market, is constantly looking for a balance point, and some large money makers often use this to their advantage. Accordingly, the main task of the trader is to make the margin work for him and the overall efficiency of positive results allows not to notice negative ones.

Here it must be borne in mind that the more there was a loss of funds on the deposit, the more percentage you need to earn in order to only return the lost. For example, a loss of 20% from a deposit of 100 thousand rubles will leave 80 thousand on the account in order to return the deposit to the original figure again, the trader will have to earn 25%, working with 80 thousand rubles.

If 50% was lost and the size of the deposit was reduced to 50 thousand rubles, then you can return to the "hundred" only after having worked out 100% of the currently available 50 thousand rubles. Thus, the greater the loss, the more difficult it is to regain lost ground. There is one extremely important rule here that will allow you to immediately identify the effectiveness of your work and help stop the useless drain of the deposit at the first alarming symptoms. This is a kind of safety zone, showing the level after which the margin turns from friend to enemy.

If a trader has understood what a margin is in Forex, as well as mastered other basic knowledge and started trading, and at the same time, as a result of the decisions made, he made a drawdown of his account of 15% or more, then the applied trading strategy is not correct. Accordingly, in the future it will lead to even greater losses.

Very often traders pass this milestone, not realizing that it was necessary to stop there and revise their scheme of margin trading on Forex, since it is unprofitable and with a probability of 100% will lead to a complete drain of the deposit or cause such an unpleasant phenomenon as a margin call. which is worth considering in more detail.

Margin Call

Realizing the beauty of what margin trading in Forex and the stock market gives, many traders recklessly open trading positions with a large lot and a high level of margin. In such cases, when the forecast of the situation is made incorrectly and the price starts a strong movement against the direction indicated by the trader, and a margin call may occur, after which the broker will have the right to independently decide to close the trader's trading position.

There is one very popular misconception regarding this phenomenon. When a "margin call" occurs, that is, the trading account is experiencing a deficit of collateral for a buy / sell order placed on the market, the position is not yet subject to forced closure by the broker. That is, at the moment when the broker sees that the trader is suffering large losses, he contacts him and asks him to increase the amount of the deposit in order to provide a margin on the margin, thus warning about the high risk of the transaction. Many brokers call this "margin call" a warning signal, and it usually occurs when the trading account draws down at the level of 30%.

In general, in the field of working with financial markets, it is considered reasonable not to allow a drawdown below 10-15%.

In cases where the trader did not react to the broker's margin call and the minimum level of 25% of the initial deposit was reached on the trading account, the broker is obliged to close the trading position without waiting for further development of situations. The dealing center does not make this decision independently. Such a closure is dictated by the legislation in force in almost all countries, therefore, no agreements and persuasions on the part of a trader can prevent the forced completion of placed orders, if after a margin call the situation regarding price movements in the market has not changed and an additional amount of funds has not been added to the trading deposit.

State regulation of margin call

Why such a mechanism of state regulation has been created, which obliges each broker to forcibly close a trading operation or even many of a trader's operations? The Federal Financial Markets Service introduced this standard so that in the event of heavy losses for client positions and sharp price jumps, the trader does not remain in debt to the broker. That is, in any development of events, no matter how high the margin is used, when a trader with one thousand dollars on a deposit manages millions in trading, he always risks only his trading account. No more!

Thus, the minimum level is the last safety measure that prevents the occurrence of situations in which a trader might have to go to extreme measures, selling houses, apartments, cars, etc., in order to return the broker's money. Forex margin trading is a legally regulated professional labor activity with a number of warning rules aimed at regulating the relationship between a broker and a trader. This is the fundamental difference between working on Forex and the sphere of gambling, with which unlucky traders, as well as people who do not understand the principles that formed the basis for creating a single interbank market for foreign currency exchange, are so often compared to activities in the international currency market.

The paradox of margin trading

There is a very interesting paradox, the essence of which is that leverage reduces the potential risk. Despite the seeming absurdity of such a statement, in practice everything is exactly the same and margin is an invaluable tool in the hands of a professional. For example, a trader has 10 thousand rubles on his deposit. There are approximately 250-255 trading days in a calendar year. Considering that work in financial markets refers to mental work, then you should give yourself 50-55 days for periodic rest, which will help maintain clarity of thinking. At the same time, this approach leaves a convenient figure for calculations of 200 working days.

So, one of the unspoken rules of working in Forex and other financial markets, for which you actually need to know what margin is, says: "You don't need to try to earn everything here and now." It will be quite sufficient to work stably, showing some very modest financial result. For example, half a percent (0.5%) per day. If we consider that the daily fluctuations of the securities of the same Sberbank are 2-3% per day, then earning 0.5% will not be at all difficult.

But, one of the extremely dangerous phenomena is triggered here - the victory of emotions over common sense. If a trader does not control his feelings, then he can regard 0.5% as something extremely insignificant, for which it was not worth starting to study what is Forex margin trading, earnings on stock prices and other activities. In fact, the client exhibits common human greed, which is one of the main enemies of every trader.

At the same time, after a little counting, it would be possible to calculate that 0.5% per day will give 171.15% at the end of the trading year, if you do not withdraw the regularly accumulated profit. That is, in one year without much risk and any complex strategies, 10 thousand rubles can be turned into 27,115.17 rubles, having received 17 thousand rubles of net profit.

How to reduce your risk

Having mastered the above, you can pay special attention to how, by knowing what margin is in Forex and in the stock markets, you can reduce trading risks. For a better understanding, the example from the previous subparagraph will be continued. So, taking a share, the value of which is equal to 90 rubles, you can earn the 0.5% described above, catching the price movement of only 45 kopecks. Now, no matter how many shares are bought, after the price has passed the required 45 kopecks, the trader will earn his 0.5%.

But with leverage, you can buy a lot more. Even with a minimum value of 1 to 1, you can buy twice as many shares for the same amount. Here, of course, the question of greed is again relevant. Having received an increased volume of shares, you may want to earn not 0.5%, but 1%. The main thing here is not to succumb to emotions that have ruined a very large number of traders on the market, but to use what the margin gives to earn the same 0.5%.

So, if you set your goal to earn your daily half a percent using the leverage, then you can achieve it by catching the price movement not at 45 kopecks, as before, but only at 22-23 kopecks. Obviously, catching a small price movement, fixing the desired profit and exiting the market is much less risky using margin than trading with your own funds, waiting for a twice as strong price movement of 45 kopecks to occur, which allows you to take a predetermined profit. Using this logic, you can continue by increasing the leverage to the level of 2 to 1. Here, to get the same 0.5% per day, it is enough for the price to pass only 10-12 kopecks.

Outcome

Having learned what margin is on Forex, you can safely use this convenient tool to your advantage, receiving significant amounts of profits even with a very modest deposit. Having first appeared on the stock exchanges, margin trading in the securities market has become a starting point from which everyone who wants to master the difficult, but interesting and extremely profitable profession of a trader can take other people's money without fear, risking only the size of their deposit.

The idea behind trading on margin is that you can use more money than you actually have on hand. When using margin, the main thing is to learn how to manage your risks at any given time. Margin is not recommended for novice traders or those who cannot consistently earn on the market. In this article, we will look at one of the strategies for day trading with margin.

Why is it better suited for day trading

Trading on margin is an activity that requires constant attention. Items need to be monitored more closely than a 2-year-old son in a crowded supermarket. When day trading, you can dispose of an amount that is up to 4 times your own funds. This allows a person with a very small account balance to trade like a serious trader ... Almost every newbie thinks that trading on margin is better because they have more money at their disposal. But this is not the case. using margin is better, because the very process of trading requires increased attention from you. Unlike swing traders, who are exposed to the risk of overnight news or macroeconomic events during the day, you, the day trader, are tied to your position at every tick of its existence. You are forced to actively manage your margin because you are actively managing your position. This reduces the likelihood of significant price fluctuations that could ruin your trading account.

Ability to instantly increase or decrease position size

When you get lucky in the marketplace, you start to feel like Michael Jordan in one of 6 Bulls championships. It seems that whichever trade you open, you are bound to be the winner. But everyone will tell you that when you win in this business, you have to step on the gas pedal; and when things aren't going well, tighten your belt. The ability to instantly increase or decrease your risk profile is often what separates the average trader from a good one. For example, you had a 200% short position that you planned to hold for a year. But after 9 months, you found that your score was down 50% due to overuse of leverage. Should you just close such a position? Yes, it can be done; but what will you do at such a moment? Will you take advantage of the extra margin to win back losses? Or reduce the amount of investment, because you are not sure what you are doing? If you cut your used margin, it will take three times as long to return to breakeven. Do you see how excruciating this kind of thinking can be? Day trading allows you to cyclically decrease or increase your margin on a weekly or even daily basis. Let's reproduce the same scenario, but applied to a day trader. The trader was losing money 5 days in a row. It seems to him that he is confused, and his account balance has decreased by 10%. He decides to reduce the size of positions to the level of his own funds until he can compensate for the loss. It takes a trader 3 weeks to do this. Very quickly, he returns to trading without restrictions.

How does the situation get out of control?

Now you are probably asking yourself the question: "If using margin in day trading is good, why do so many have significant difficulties?"

Day trading allows you to:

1) focus on your trading

2) quickly adjust the used margin based on the trading results.

So why do so many suffer losses? Simply put, day trading gives you ample opportunity to manage your trade, but it can also lead to overtrading. The ability to open many trades uncontrollably can be disastrous for someone caught in a losing streak. Add four times the leverage to the unlimited number of trades, and you will understand where so many lost accounts come from.

Let's take an in-depth look at the hard and simple rules that work well for intraday trading:

Use margin only after 3 consecutive months of profitable intraday trading.

Use only 10% of the available margin on any single trade. So, if you have 2500 of your own funds, or 10000 with a margin of 1: 4, use only 1000 $ in one trade.

Open no more than 3 deals at the same time. With the numbers mentioned in the previous example, your maximum investment is $ 3,000, which is 20% more than your own funds.

Never lose more than 2% of your equity in one trade. That is, in each trade, the maximum loss should not exceed 2.5%.

Never leave a position overnight. If you are day trading, then do just that - trade intraday.

If the week is unprofitable, you need to reduce the used margin by 25%. Continue to reduce linearly until a profitable week appears. Use the same approach when raising your margin back to the maximum. For example, if the week was unprofitable, reduce the used margin from $ 10,000 to $ 7,500. If the next week is also unprofitable, lower this limit to $ 5,000. When you reach your balance level of $ 2500, reduce the cap by 25% weekly. As you limit the amount available for trading, your concentration on trading will increase and you will return to profit again. There is no better motivator than simple survival.

Having access to margin gives the illusion that unlimited wealth is near. If you don't take action, you will begin to feel attached to this money as if it were your own. In fact, margin is a terrible weapon in the wrong hands. She needs to be handled with care so that fear of what she might do to you (in a professional and personal sense) does not allow such an attachment to arise.

Keep up to date with all the important events of United Traders - subscribe to our

Economic terms are often ambiguous and confusing. The meaning laid down in them is intuitively clear, but rarely anyone succeeds in explaining it in public words, without preliminary preparation. But there are exceptions to this rule. It happens that a term is familiar, and with an in-depth study of it, it becomes clear that absolutely all of its meanings are known only to a narrow circle of professionals.

Everyone has heard, but few people know

Let's take the term "margin" for example. The word is simple and, one might say, commonplace. Very often it is present in the speech of people far from the economy or stock trading.

Most believe that margin is the difference between any of the same metrics. In daily communication, the word is used in the discussion of trading profits.

Few people know absolutely all the meanings of this fairly broad concept.

However, a modern person needs to understand all the meanings of this term, so that at an unexpected moment for himself “not to lose face”.

Economic margin

Economic theory says that margin is the difference between the price of a product and its cost. In other words, it reflects how effectively the activities of the enterprise contribute to the conversion of income into profit.

Margin is a relative indicator, it is expressed as a percentage.

Margin = Profit / Income * 100.

The formula is quite simple, but in order not to get confused at the very beginning of learning the term, consider a simple example. The company operates with a margin of 30%, which means that in each ruble received, 30 kopecks are net profit, and the remaining 70 kopecks are expenses.

Gross margin

In the analysis of the profitability of the enterprise, the main indicator of the result of the activities carried out is the gross margin. The formula for its calculation is the difference between the proceeds from the sale of products in the reporting period and the variable costs of producing these products.

Only the level of gross margin does not allow for a full assessment of the financial condition of the enterprise. Also, with its help, it is impossible to fully analyze individual aspects of its activities. This is an analytical indicator. It demonstrates how successful the company is as a whole. is created at the expense of the labor of employees of the enterprise spent on the production of products or the provision of services.

It is worth noting one more nuance, which must be taken into account when calculating such an indicator as "gross margin". The formula can also take into account income outside the implementation of the economic activity of the enterprise. These include the write-off of receivables and payables, the provision of non-industrial services, income from housing and communal services, etc.

For the analyst, it is extremely important to correctly calculate the gross margin, since enterprises are formed from this indicator, and in the future, development funds.

In economic analysis, there is another concept similar to gross margin, it is called "profit margin" and shows the profitability of sales. That is, the share of profit in total revenue.

Banks and margin

The bank's profit and its sources demonstrate a number of indicators. To analyze the work of such institutions, it is customary to calculate as many as four different margin options:

The credit margin is directly related to the work under credit agreements, it is defined as the difference between the amount indicated in the document and the amount actually issued.

Bank margin is calculated as the difference between interest rates on loans and deposits.

Net interest margin is a key indicator of banking performance. The formula for its calculation looks like the ratio of the difference in commission income and expenses for all operations to all assets of the bank. Net margin can be calculated on the basis of all the assets of the bank, and only from those involved in the work at the moment.

The margin is the difference between the assessed value of the collateralized property and the amount issued to the borrower.

So different meanings

Of course, the economy does not like discrepancies, but in the case of understanding the meaning of the term "margin" this happens. Of course, on the territory of one and the same state, everything is completely consistent with each other. However, the Russian understanding of the term "margin" in trade is very different from the European one. In the reports of foreign analysts, it presents the ratio of the profit from the sale of a product to its selling price. In this case, the margin is expressed as a percentage. This value is used for a relative assessment of the effectiveness of the company's trading activities. It is worth noting that the European attitude to the calculation of margin is fully consistent with the foundations of economic theory, which was written above.

In Russia, this term is understood as net profit. That is, making calculations, they simply replace one term with another. For the most part, for our compatriots, the margin is the difference between the proceeds from the sale of goods and the overhead costs for its production (acquisition), delivery, and sale. It is expressed in rubles or another convenient currency for settlements. It can be added that the attitude to margin among professionals is not much different from the principle of using the term in everyday life.

How is the margin different from the trading margin?

There are a number of common misconceptions about the term "margin". Some of them have already been described, but we have not touched the most common one yet.

Most often, the margin indicator is confused with the trading margin. It is very easy to tell the difference between them. The margin is the ratio of profit to cost. We have already written above how to calculate the margin.

A good example will help dispel any doubts that have arisen.

Let's say a company bought a product for 100 rubles, and sold it for 150.

Let's calculate the trade margin: (150-100) / 100 = 0.5. The calculation showed that the margin is 50% of the cost of the goods. In the case of margin, the calculations will look like this: (150-100) / 150 = 0.33. The calculation showed a margin of 33.3%.

Correct analysis of indicators

For a professional analyst, it is very important not only to be able to calculate the indicator, but also to give a competent interpretation of it. This is a challenging job that requires
great experience.

Why is this so important?

Financial indicators are rather arbitrary. They are influenced by valuation methods, accounting principles, the conditions in which the company operates, changes in the purchasing power of the currency, etc. Therefore, the result of the calculations cannot be immediately interpreted as “bad” or “good”. Additional analysis should always be performed.

Equity Margin

Exchange margin is a very specific metric. In the professional slang of brokers and traders, it does not mean profit at all, as it was in all the cases described above. The margin in the stock markets becomes a kind of collateral when making transactions, and the very service of such trades is called "margin trading".

The principle of margin trading is as follows: when concluding a deal, the investor does not pay the entire amount of the contract in full, he uses his broker, and only a small deposit is debited from his own account. If the result of the transaction carried out by the investor is negative, the loss is covered from the security deposit. And in the opposite situation, the profit is credited to the same deposit.

Margin transactions provide an opportunity not only to make purchases using the borrowed funds of the broker. The client can also sell borrowed securities. In this case, the debt will have to be repaid with the same securities, but their purchase is made a little later.

Each broker gives its investors the right to make margin transactions on their own. At any time, he can refuse to provide such a service.

Benefits of margin trading

By participating in margin trades, investors receive a number of benefits:

The ability to trade on financial markets without having large enough amounts on the account. This makes margin trading a highly profitable business. However, when participating in operations, one should not forget that the level of risk is also not small.
An opportunity to receive it when the market value of shares decreases (in cases where a client borrows securities from a broker).
To trade in different currencies, it is not necessary to have funds in these currencies on your deposit.

Management of risks

To minimize the risk when concluding margin transactions, the broker assigns to each of its investors the amount of collateral and the level of margin. In each case, the calculation is made individually. For example, if a negative balance appears on the investor's account after a trade, the margin level is determined using the following formula:

UrM = (DK + SA-ZI) / (DK + SA), where:

DC - the investor's funds deposited;

CA - the value of the investor's shares and other securities accepted by the broker as collateral;

ZI - an investor's debt to a loan broker.

Tracking is possible only if the margin level is at least 50%, and if otherwise is not provided for in the agreement with the client. According to general rules, a broker cannot enter into transactions that will lead to a decrease in the margin level below the established limit.

In addition to this requirement, a number of conditions are put forward for conducting margin transactions in the stock markets, designed to streamline and secure the relationship between the broker and the investor. The maximum amount of loss, the terms of debt repayment, the conditions for changing the contract and much more are discussed.

It is rather difficult to understand all the variety of the term "margin" in a short time. Unfortunately, in one article it is impossible to tell about all the spheres of its application. In the above reasoning, only the key points of its use are indicated.

Mikhail Adamov

Reading time: 4 minutes

A A

Margin trading is called trading operations (monetary or commodity) carried out with the help of credit capital, which an investor receives from a broker against a security of a certain amount. This is the margin that secures the loan. The main difference between margin lending and ordinary lending is in the amount received - as a rule, it significantly exceeds the margin, that is, the amount of the collateral.

How margin lending works

Margin lending - This is a kind of tool that allows you to increase the profitability of operations. The principle of its work is to increase the financial result through the use of financial "leverage". In other words, the income from a transaction carried out with borrowed funds? can be incomparably higher than the profitability of an operation in which only the trader's personal funds were used.

The proportion expressed the ratio between the collateral and the funds allocated for it is called leverage. Suppose the ratio is defined as 1: 100? or the same value is simply indicated as a percentage - 1%. These numbers mean that the capital received by the trader is 100 times higher than the collateral / That is, for the collateral, he needs an amount corresponding to 1% of the total volume of the proposed transaction. Under this condition, it will be possible to make a trade operation.

Scheme of work with margin trading

A trader in a DC opens an account for trading. Then it should be replenished with a certain amount, which will become the margin (collateral).
When a trader performs an operation, the dealing center allocates the required amount of finance and the operation is funded by the DC.
Then, on the client's account, that part of the funds is blocked, which is equal to the leverage and depends on the deposit amount. The remaining capital is used to cover probable losses.
If the available funds have run out and, accordingly, there is no capital to cover the losses, then the position is closed in a compulsory form. This action is called Margin.

After the deal is closed, all previously blocked capital becomes available.

For example, on the account of 4,000 dollars, DC gives a leverage of 100: 1 (1%). When a deal of 100 thousand dollars is opened, then 100 thousand US dollars are bought with borrowed funds; and immediately one percent of the spent amount is blocked on the trader's account. Thus, $ 1,000 is blocked and $ 3,000 can be used to cover losses. And so - until the available funds run out.

Margin trading rules

When trading on margin you need to open a special margin account, Margin Account. It is somewhat different from where only your capital is used. In the process of opening it, according to the law, the broker receives the signature of the trader. A margin account can be viewed as part of an agreement with a broker for a standard trader's account or as a separate agreement. The size of the minimum deposit for a Margin Account is usually 2,000 US dollars or more, this is the so-called minimum margin, Minimum Margin.

Fundamental rules

After the sale first of all, the debt to the brokerage company is covered. The account must constantly contain the amount or the equivalent of the amount, which is called the Maintenance Margin and is a kind of credit insurance in case of a decrease in the investment value.
Lending service is always paid... Therefore, in addition to collateral, you should also take into account the payment of interest for the use of credit capital. The interest rate scheme is standard. It depends on the size of the borrowed amount and the length of the period when it is used.

The main risks

Any trade involves risks.

What are their main types?

What is the risk of a borrower using a margin type of trading? What brokers giving margin loans should be alert a potential customer?

An incorrect forecast of the market movement causes a significantly larger loss than conventional trading using equity capital.
The need to maintain the actual margin above the critical level entails the sale of a certain proportion of assets. This, in turn, leads to the need to record losses in relation to some transactions and additional spending on the payment of commissions.
The amount of interest for the use of credit money and the accrued income tax for transactions (for individuals) often exceed the income received from the transaction.

Rate this article -

To protect the clearing house and the exchange from losses, traders must deposit funds to the futures operator in the form of an initial margin, which acts as a guarantee fee.

Feedback

Initial margin

The concept of margin (margin, margin) is a preliminary guarantee deposit, which the client transfers to the account of the brokerage company. The margin is required by participants in financial futures trading. Money in hard currency, stocks, bonds can be used as collateral ...

In a broader sense - in banking, stock exchange, trade insurance practice, margin is understood as the difference between interest rates, securities prices, commodity prices and other similar, homogeneous indicators that take place at the same time in different conditions of sale, purchase, lending ... In terms of meaning, closer to the word margin (margin) are "difference", "profit", "deposit".

The idea of margins is also that if the client cannot, for some reason, fulfill his obligations under the contract, then the clearing (settlement) house will be able to use it to pay off the open position. With the help of margins, the clearing house can manage the significant risk associated with futures contracts.

Margin is a kind of guarantee that market participants will fulfill their contractual obligations. The initial margin deposit is a small percentage of the total contract value. It allows you to maintain the financial reliability of the futures markets and provide market participants with the financial leverage that is the main feature in trading in the futures markets.

The very fact that a futures contract is not intended to be used as a transfer of an underlying asset from a seller to a buyer suggests that there is no need to pay the full value of the contract.

The initial margin is paid for each open position and varies depending on the volatility of the prices of the underlying assets, but it usually ranges from 3% to 25% of the value of the underlying asset described in the contract. Initial margin is an instrument that guarantees the exact execution of the contract, and not a means of payment for an asset being sold or bought.

Since the exchange (clearing house) guarantees the fulfillment of obligations under all futures contracts, it is, as a result, itself at risk, as it will incur losses if traders do not fulfill their obligations on transactions. To protect the clearing house and the exchange from losses, traders must deposit funds to the futures operator in the form of an initial margin, which acts as a guarantee fee.

If the trader does not fulfill his obligations under the contract, the broker uses the initial margin deposited as a security deposit to cover the losses incurred. This provides a certain degree of protection for the clearing house and the exchange as a whole.

Despite the fact that the initial margin averages about 15% of the full value of the contract, the potential losses from the default on the futures contract will be significantly greater than the posted security deposit.

To buy or sell a futures contract, you must open a brokerage company. This account must be kept separate from other possible trader's accounts. When the account is opened, the trader is required to make a deposit, which is designed to guarantee the fulfillment of obligations (the initial margin, often also called the operating margin).

This margin is approximately 15% of the total value of the futures contract. However, it is often specified as a certain dollar amount regardless of the value of the contract. In addition to the initial margin, there is a maintenance margin, which is usually 7-12% of the value of a futures contract.

The margin is set by each exchange. Brokers are allowed to set their own margin. Typically, higher margins are required on futures contracts that have greater price volatility, as clearinghouses potentially face large losses on such contracts.

For example, a July wheat contract of 5,000 bushels at $ 4 a bushel would have a value of $ 20,000. With a 5 percent initial margin, the trader must make a deposit of $ 1,000. This deposit can be made in cash or treasury bills, or using the bank's credit line. The deposit is the actual amount on the account on the first day.

Initial margin provides some clearinghouse protection, but not fully. If the wheat futures price rises by $ 5 a bushel by July, then the clearinghouse losses will amount to $ 4,000. Additional protection for the clearing house is provided by clearing together with maintenance margin. This is another key point.

Maintenance margin

Additional protection for the clearinghouse is provided by the so-called maintenance margin. Since this share is about 65%, the trader must maintain an amount equal to or greater than 65% of the initial margin. If this requirement is not met, the investor will receive a margin call from the broker. This is a notice that an additional amount of money has been deposited into the account up to the level of the initial margin.

Margin call

Margin call is another key part of futures trading. According to the requirements of the clearing house and the brokerage company, the client must have in his account an amount equal to or greater than a certain fraction of the initial deposit.

The initial margin for trading one contract in oil is $ 3,000. If, as a result of trading, the client's account is below this amount, then he will be required to deposit the amount that is missing to the initial margin. If the investor does not respond to the notification, then the broker most often closes the investor's position with the help of an opposite transaction at the investor's expense.

Variation margin

The variation margin is calculated daily based on the results of the trading session for each open position of the trader. For an open position of the seller, the variation margin is equal to the difference between the contract value at the opening price of this position and the contract value at the quoted price of this trading session.

For a buyer's open position, the variation margin is equal to the difference between the contract value at the quoted price of this trading session and the contract value at the opening price of this position. Variation margin increases or decreases the required amount of collateral and is a potential profit or loss for the trader. If the variation margin is negative, then it increases the required amount of collateral, if it is positive, then it decreases the amount of call margin.