The foreign exchange market, commonly known as the forex market, is a global market for trading currencies. Unlike the stock market which works in fixed hours on weekdays, online currency trading functions 24 hours from Monday to Friday across the globe.
The market consists of traders who buy and sell currencies by pairing them with the aim of getting a profit by opting for either margin or leverage trading. To know more about them, read on to know more.
Why Margin or Leverage Is Required?
In forex trading, traders tend to see a huge potential in gaining returns by investing more than the money in hand. To do so, they tend to borrow money from a forex broker to gain more money to invest. In return, an assurance is given to the broker that the borrowed money will be repaid with interest.
There are two techniques traders use to invest more money than what they have in hand- margin and leverage. Read on to know more about them.
What is Margin?
Margin refers to a small amount that is deposited as a collateral or security deposit to open a position while trading in forex. It is set aside by the broker so that the traders can help cover any losses that can occur during trading.
To trade on margin, you will have to open a margin account in which the broker deposits the money. Once the money is deposited, it is locked for a certain time period and once the trade is complete, the money is released back to the trader’s account.
What is Leverage?
Leverage is the purchasing power a trader gets by taking a loan from a forex broker for a forex investment. It is generally expressed as a ratio of the value of the currency to the amount of money needed to make the investment. For example, if a trader has 100 Dollars in hand and the leverage ratio is 1:1000, the trader can buy foreign currency up to 1000 times of the cash in hand i.e., 100000 Dollars.
Difference Between Margin and Leverage
|Defined as the money invested by a trader by providing a collateral.||Trading power gained by a trader to make more investment is known as leverage.|
|They come with more risk.||They are comparatively safer to invest.|
|A margin account is mandatory||Can be done without any specialised account.|
Leverage in forex trading is apt for those who want to make profits in a short span of time. However, when the forex value decreases, the trader has to bear all the losses and pay interest for the amount given as a loan simultaneously. The broker may also sell the remaining forex to avoid further losses. Traders who want to play safe may opt for margin trading but the profits are comparatively lower when compared to the ones gained from leverage in forex trading.
While trading in margin and leverage have their own pros and cons, it is crucial to decide which technique suits the trader by taking a more calculated approach. Choosing between margin and leverage varies from person to person, especially regarding how much risk they are willing to take. To know more, download Dhan and explore the world of trading.