How Margin Trading Works

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Margin pertains to the amount of money to be deposited with the broker intended for purchasing of securities. The economic effect of using the margin is that the client has the opportunity to gain the entire open position, while at the same time covering the credit risk.

And there are various events which can lead to risk exposure, and these include the selling of assets short, obligations arising from borrowed funds or having committed into a derivative contract.

On the other hand, margin ratio is the ratio of the client’s own funds and the open position (securities purchased), for example, a ratio of 10:1 means that the margin deposited with the broker for an amount of 1.000 GBP, translates to the customer purchasing securities (opening position) for the amount of 10,000.

Investors buy shares in securities firms to stand a chance of gaining, shares purchased will be retained by the broker. The investors benefit from rising stock prices, or suffer losses due to falling stock prices.

Margin requirement is a demand made by the broker to the customer to pay a given amount of money so that the size of the margin will not fall below the minimum required by the broker. Initial margin requirement is the original amount the customer must file with the broker to start trading.

Supporting the margin requirement relates to the amount the customer must file with the broker to fill the margin after the start of margin trading. And the accumulated losses from the revaluation of the client’s open position may decrease in the margin minimum value required by the broker.

Margin buying refers to the purchasing of securities with money borrowed from a broker, at the same time employing some securities as collateral. In turn, profits or losses on the securities are magnified. Cash deployed in such a transaction is initially equivalent to the value between the securities and the loan.

Essentially, the variation has to be maintained higher than the minimum margin requirement. This is due to the fact that it serves as protection for the broker in case of a fall in the value of the securities.

The current liquidating margin constitutes the value of a securities position in the event the position liquidating instantly. On the other hand, the variation margin or maintenance margin does not constitute collateral, instead a daily disbursement of profits and losses. Futures are typically marked-to-market on a daily basis, in that way the current price is placed in comparison to the previous day’s price.

 

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