Understanding margin accounts: how does it work

Given the immense popularity of currency trading in today’s world, we are seeing a vast number of people trying to engage in this field. Technological advancement has made it possible to establish online exchange platforms where buyers and sellers would communicate and perform trading procedures. However, this task is not as simple and straightforward as it might seem at first glance since currency trading is connected with a lot of concepts that are hard to comprehend for newbies.

In this guide, we would like to touch on some of the most prominent aspects of currency trading, which include account types and in particular, margin accounts. Understanding the different types of accounts is essential for every trader since you have to carefully consider your requirements and pick out the most convenient option in order to get the most out of trading.

So, what exactly is a margin account, and how can you get the most benefit by using them? Down below, we will try to provide an in-depth answer to this question in order to make it comprehensive for novice traders and give them the opportunity to take maximum advantage of this resource!

What Is a Margin Account?

In the simplest of words, a margin account means that the brokerage platform will lend you a certain amount of money in order to buy stocks and start trading, but as you may have already guessed you have to pay an interest rate later. Generally, this is a perfect opportunity for beginners who don’t have enough balance to start trading, so brokers try to get them at a starting point of their trading career.

Due to the fact that we are dealing with borrowed money in this case, keep in mind that every win or loss will be magnified since you will be using leverage. What’s more, you have a chance to trade various financial products when it comes to margin accounts, including futures and options, but when you are trading stocks, a margin fee or interest will be charged on borrowed money.

It is important to choose a reliable broker first that provides this resource. As we can see in FBS matched against XM through the investfox comparison tool, both these platforms will certainly be suitable for your needs.

Working Mechanism of Margin Accounts

Now that we know what margin accounts are, it is time to explain how they work and what are the proper ways to use them to a greater effect. The first and foremost advantage of margin accounts is that they allow investors to earn a positive income in case their purchased securities will get a higher value compared to the interest rate charged on the funds. So, the total income will be a lot higher than you would have if you used your own cash to buy securities.

On the flip side, this process has its own downside as well since your cost of purchasing securities might be increased drastically as long as the loan is outstanding. In this case, brokers apply interest rates on the margin funds and in case the price of purchased securities will fall, you will be obliged to pay interest to the brokerage platform.

Also, you have to keep track of the maintenance margin level of your margin account’s equity. In case it drops to a certain level, then the brokerage platform will make a so-called margin call to the investor. This means that you will have a couple of days in order to offset the difference between the maintenance margin and the security’s price by providing more funds in your account or buying a certain amount of stocks.

When brokerage companies provide margin accounts to customers, they keep the right to carry out different procedures if need be. For instance, they might ask you to increase your account balance and sell your securities if there is a danger of losing their own money. What’s more, if you have a negative balance in the margin account or fail to fulfill a margin call, then brokers will most likely sue you!

Considering all the factors mentioned above, it is crucial to have a thorough understanding of the market as well as investment risks and requirements in order to succeed in this task. There is a serious risk of losing much more money than you have provided in the margin account in the first place, thus you have to be extremely careful in this process.

We want to point out that apart from stocks, you have a chance to purchase other financial products as well with margin accounts. Regulatory companies usually set the minimum margin requirements which might be surged on certain brokerage platforms. This amount is different for every broker, but generally, the minimum margin needed for futures is lower than for stocks. For instance, most of the time stock traders have to pay 50% of the value of a trade, whereas this number gets as low as 10% for future traders. As you can tell, it is very simple to use margin accounts when trading currencies, and bear in mind that they come with their own benefits and drawbacks. Hence, it is essential to educate yourself thoroughly before opting for this resource in order to accomplish desired results!