Multi-million dollar transactions are made on the stock market every day. But to manage such amounts, private investors do not always have the financial capacity. The solution is Free margin, which allows reducing risks.
What free margin and its calculation are used for
Free margin or margin represents the collateral that must be in the trader’s account to make large transactions. It is a kind of security deposit, which helps to make transactions at a high price. Margin does not serve as a repayment option and can be much less than the loan amount.
All operations on the Forex market take place in two stages:
- select the best assets to sell or buy.;
- do business at the best possible price.
Before you start working with a trader, you should get acquainted with the basic concepts. A pip is the smallest unit of sale on the exchange. Its size is formed on the basis of the currency chosen for the operation. The lot concept is used to determine the asset size. Leverage allows a trader to take part in transactions whose value exceeds his capital. It allows performing trading operations, the amount of which is much larger than the funds available to the trader. Due to this, medium and small investors are represented in the Forex market, which offer small lots.
Leverage shows the ratio and comparison of personal capital and funds that were borrowed from the trader.
To make an application at the exchange, contributions must have two indicators – the minimum and maximum size. In case the application is accepted, the broker may change the margin amount. Its amount depends on the leverage.
If the down payment amount is large, it can be reduced with leverage. The larger it is, the smaller the down payment. The second option is to make a lot of transactions. In this case, their amount does not matter, the number of transactions is important.
When calculating the margin, there are some features that require attention:
For the base currency a quote is accepted, for example USDCHF is US dollar.
The size of the contract. For calculation of 1 lot 100 000 base currency is used. If the lot size is 0.01, then 100000*0.01 is needed, which is 1000.
After the deposit is calculated, its value in the base currency should be converted into the currency used for the deposit. For example, you need to open the initial order, where the leverage is 200, and the lot – URUSD 1.2937, the base currency – Euro. To calculate the margin in this case, you should divide the contract size by the leverage: 100000/200=500. The resulting number is translated at the current rate and this result is a margin.
