What Does Trading on Margin Mean

In the financial world, investing and trading can be a complicated network of terms, numbers, options, choices and variables. Many of these terms are used to try and confuse investors who are unfamiliar with the markets, as well as to stymy regulators of the financial markets. One term that is well understood amongst successful investors is margin.

Margin is collateral towards an investment or risk portfolio. An investor will make a purchase of a stock or investment product with a market value. Rather than investing the full amount of the investment, the investor will trade on margin. The investor contacts a broker firm to find out what the margin is on a particular stock or commodity. The investor then puts that money into the purchase of an investment. The brokerage firm lends the investor the rest of the market price of the investment. If the product increases in value, the investor reaps the reward.

In the event that an investment declines in value, the devaluation is subtracted from the investors holdings, not the brokers. The investor must maintain the margin value on the investment. If the loss is greater than the margin, the investor must invest the amount of the margin and the decrease beyond the original margin holding. If the investor cannot or does not want to, they must sell the investment, and repay any loss to the broker.

To put this into different terms, suppose that you want to buy a stock from ABC. The share price at the time is $50. You contact the broker and ask what the margin is. They inform you that it is $12. You invest $20, while the broker puts up the $30 difference. If ABC closes tomorrow at $52, the broker gets a share and you get a share, depending on the split. If ABC closes tomorrow at $45, your holding in the stock is reduced to $15. If ABC closes down again the following day at $35, your holdings are $5 in the stock. You must maintain the $12 margin. You then must decide whether to invest $7 or more back into the stock, or sell it for the loss. The broker does not take a loss on this investment.

Forex trading, or foreign exchange currency trading, works on margin in the same way. The value of currency is used to determine the margin, then the investors place money into the traders care to make money. If the currency increases, the investor profits. If it doesn’t, the investor must make the same decisions as with traditional stocks.

Lucror FX is one of the largest Forex trading companies in New Zealand. Lucror FX knows and understands how to operate on margin, and how to limit the risks for investors while providing the best returns possible. Lucror FX can be reached online at www.lucrorfx.com for information about investment opportunities, new accounts and margin trading opportunities in New Zealand.

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