A forex margin is essentially the difference between an investor’s actual liquid cash and the amount a broker is willing to put up for the same investor, over and above the actual capital investment of the client. In other words, this is an amount loaned by the trader/broker to the investor. The amount of which depends on the actual money given to the latter by the former. This article will discuss the basics of margin trading and then discuss the importance of a margin calculator.
For example, Mr. A and Trader 1 enter into an investment agreement. Trader 1 agrees to be the Forex broker for Mr. A. Both parties agree that a margin account in the percentage of 1:100, meaning $1 deposited is equals to $100 in a margin account. Therefore, if Mr. A deposits $100 to the margin account then he has $10,000 usable capital to invest.
The Rationale behind this agreement is to give a stockholder a higher amount of investing power. Deponents of this approach argue that the lure of easy money earned by investing in Forex is bellied by the huge risks involved should the investor lose big in a trade. This is not even talking about what happens if the investor does not have the actual funds to cover the actual losses from the margin account.
Proponents of margin accounts on the other hand state that these accounts are necessary for Forex trading to continue doing business in a fast-paced environment. This is because these margin accounts are not designed to create capacity to invest when there is none but rather to allow a trader to do perform with minimal capital changing hands. Anyway, the percentage of the margin is agreed upon and the investor is warned to have available funds equal to the margin account in case of a loss. It is not the fault of the trader if the investor chose to speculate and take out a margin account disproportionate to the actual financial capacity of the same.
Enter the Margin Calculator
These are available online, are downloadable and can even be performed using a simple calculator (provided you know what you are doing). Simply put, margin calculators allow the investor and the broker to determine the percentage of actual money invested to the total “loanable” amount in favor of the former. Margin calculators use the same basic formula:
M = 100 x (V-L)/V
M = margin
V = market value of the stocks
L = amount loaned by the broker
Margin Calculator Rules
Your initial margin is set by Federal Regulation via the Federal Reserve Board. The initial margin is 50% at the time of your purchase. After purchase, the New York Stock Exchange requires that you keep a maintenance margin of 25% to 30%. If your margin falls below these points, the broker will issue a margin call. This means you need to pay the difference or your stocks will be sold immediately to cover the difference. If you do not want this to happen then you need to watch your margin limits closely. The bottom line is, a margin calculator has many uses, and this is especially true if you actively trade in the Forex. Therefore, you need to learn to use one as soon as possible.