What is margin trading?
20221102 11:22What is margin trading?
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November 2, 2022 at 11:22 am #4895
Lets say you are a small trader and you don’t have enough money to buy a car, but you have a good experience in term of car trading to your clients, so When you open an account with an autodealership, for example, that allows margin trading, you will lodge in advance a small fixed amount of money that will stay intact until you settle to purchase a car, then your credit will be split up into two sections:
The margin used is the margin that will be deducted in advance. It is a refundable deposit that will be returned to your account after selling the car, whether it is traded at a gain or loss.
Available margin (usable margin): the amount remaining in your account after deducting the used margin, and this amount are the maximum loss you can have after selling the car to your client.
How to calculate the user’s Used margin and usable margin?
We do not want to yield too much attention to how to calculate margin used by yourself. Often you do not need to, since the forex broker will adjust automatically.
In the previous example, let’s say that the value of the whole car = 10.000$ and you have deposited 3000 $, the auto dealership will tell you that it will deduct $ 1000 from your account as a user margin for each automobile you buy. If you purchase two cars you will deduct 2000 $ from your account as a used margin and your credit will remain 1000 $ as margin available.
Although the company you deal with will eliminate the need to calculate margin used by yourself, but it would be very useful to learn how managing it yourself.
The used margin can be computed utilizing the following recipe:
Margin used = total value of purchase items / multiplication ratio
In the previous example since the value of the whole car = $ 10.000 and the multiplication rate allowed by the company is 10 times, that is, the company doubled the capital to you 10 times, the margin will be derived by the authority:
Margin Used = Full Item Value / Multiply Ratio
= 10.000 / 10 = $ 1000
If you think of buying two cars instead of a car, the margin used will be deducted from your account:
Used margin = 20,000 / 10 = $ 2000
In the international markets, brokerage companies that trade marginally in different types of commodities, for each specific commodity has its own deal. Each type is sold on a fixed unit basis called contract size, which is the lowest unit traded from the commodity.
In the previous example of cars, the size of the contract = one car worth $ 10.000, that you cannot trade less than a car worth $ 10.000 and you can trade multiples of this act, such as trading two cars or three and so on.
Of course you are not allowed to trade a car and a half!!
The margin calculation method used is:
Margin Used = Number of Contracts * Contract Size / Multiplication Ratio
You will know the size of the contract you are dealing with and the proportion of the multiplication in advance before dealing with, which may vary from company to company.
Let’s look at our previous example:
We know that the size of the contract = one car worth $ 10.000 and the multiplier ratio = 10
And then we recognize that if we want to sell a car, the amount deducted by the car franchise from our account is:
Margin Used = Number of Contracts * Contract Size / Multiplication Ratio
= 1 * 10.000 / 10 = $ 1000
If we want to buy two cars will be:
Margin Used = Number of Contracts * Contract Size / Multiplication Ratio
= 2 * 10.000 / 10 = $ 2000
Therefore, you can work out the margin used for any number of cars. If we simulate that you wanted to purchase 3 cars at once, $ 3000 will be deduced as a security deposit.
If you are dealing with auto dealership makes you a double ratio of 20 times, that this dealership will let you to trade cars worth 20 times the total money you deposit you can estimate how much used margin will be deducted if you want to swap in one automobile:
Margin Used = Number of Contracts * Contract Size / Multiplication Ratio
= 1 * 10.000 / 20 = $ 500
That means that this dealership will deduct from your account $ 500 for each car you trade.
How to compute the margin available?
Computed by the following simple equation:
The margin available = Balance – Margin used
Agreeing to the previous model:
You have already deposited $ 3,000 in your account with the auto dealership you have = $ 3000
When you settle to purchase an automobile that has deducted $ 1,000 as a user margin, the margin available you have now is:
The margin available = Balance – Margin used
= 3000 – 1000 = 2000 $
It is the maximum amount you can lose on a deal.
If you take for granted that you have resolved to buy two cars, $ 2000 will be taken off as a user margin and your margin will now be:
The margin available = Balance – Margin used
= 3000 – 2000 = $ 1000
It is the maximum amount you can lose on a trade.
Thus,
The Margin Trading System is a scheme that grants you to trade goods worth more than your capital.
This case of trading deals with private companies that multiply your capital multiple times, permitting you to trade a commodity against a minor part of its value as a user’s deposit.
These societies do not share the profit or loss. They simply require you to compensate the total value of the item after selling it. Its charge is to execute the sale and purchase orders that you designate at the monetary value you choose.
If you ordered the sale of the commodity at a toll higher than the purchase price will be gone through and will derive the value of the commodity in full and will return you a deposit plus the entire profit as if you already possess the commodity.
If placed to sell the commodity at a price below the purchase price will be implemented and will be deducted from your account to complete the value of the whole commodity.
What is Margin call?

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