Investing money to trade in the foreign exchange market means opening up a margin account with a broker. A margin account is a short-term loanable amount given to the investor; the amount of which depends on the total amount actually deposited to – or for – the account of the broker/trading house. As a general rule, margin accounts represent a 1:100 ratio of actual investment to usable funds. Of course, there is more to it than that. This article will discuss how a Forex investor or enthusiast can make use of a margin calculator.
Margin calculator: Determine the Total Transactional Value
Otherwise known as notional value and is a common term used in the financial industry, particularly in derivatives and currencies. This is the total value of leverage vis-a-vis the total capital actually invested. Stated simply it is NOT the value of the client’s investments but the perceived value based on the available margin account. For example, If Mr. A invested $1,000 with Trader 1 and agreement provides for a 100:1 margin then the total transactional value is $100,000.
Margin calculator: Determine the Margin Equivalent
The minimum amount of money an investor needs to put up for the account of the broker or trading house. It is more popularly known as the margin requirement and is regulated by the Federal and State government, as well as the appropriate central agency per jurisdiction. As a general rule, the starting margin requirement is 50%, and this is set by the Federal Reserve Board. After the initial margin requirement comes the maintaining margin requirement that is usually set at 25% to 30%. Remember, failure to maintain such requirements will warrant a margin call, and if not met, sale of the appropriate number of shares to meet the minimum maintaining requirement.
Margin calculator: Determine the Forex Margin
In order to determine this you need to know the margin requirement and the transactional value. As a general rule, and as per our earlier example, the minimum margin requirement is 100,000 and the transactional value is 1% or .01. Next, you multiply the former with the latter. In this example, the resulting calculation and value would be: 100,000 x 0.01 = $1,000.
Margin calculator: Calculate the Margin-Based Leverage
First, you need to determine the notional value and the Forex margin. Going back to the previous example the calculation and resulting value would be 100,000 / 1,000. Reduce the numerator and denominator and you will get 100/1. This means that the margin-based leverage is 100 to 1.
Common Margin-based leverage expressed as in ratio:
- 400:1 or 0.25%
- 200:1 or 0.50%
- 100:1 or 1.00%
- 50:1 or 2.00%
Important Points to Remember
There are certain aspects of the computation that need to comply with federal, state, local legislation and/or ordinance. And there are some aspects that can be freely agreed upon by both parties. What is important to remember is that the Forex margin is not designed to allow speculative investing without the proper backing of sufficient capital to cover the margin account. It is designed to effectively and efficiently solidify the position of investing houses and brokers without 100% of the investment money changing hands.