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Margin trading

Financial markets are an economic system where its participants trade in specific goods - financial instruments. The system includes such participants as banks (that can play the role of market-makers), exchanges, broker companies, financial instruments (for example, funds) and individual traders. The goods that are sold by the participants, are called financial instruments or assets. In the most general sense, financial instruments are certain obligations (contracts) that prove facts of mutual demands of two parties. The first party is obligated to supply (immediately or in future, unconditionally or on certain conditions) goods, and the second - to pay (for example, with money or securities).

An important feature of the financial markets is that the money or securities themselves might be regarded as goods. But of course common (usual) goods and raw materials are also sold at the financial markets. On the basis of it the financial markets may be divided into foreign exchange markets, stock markets and raw materials markets.

An important feature of the financial markets is that the money or securities themselves might be regarded as goods. But of course common (usual) goods and raw materials are also sold at the financial markets. On the basis of it the financial markets may be divided into foreign exchange markets, stock markets and raw materials markets.

Picture 1.  Types of financial markets

In our course we will pay general attention to foreign exchange market Forex and its participants, including broker companies and individual traders. Roles and functions of others participants of the financial markets (banks, exchanges, financial institutions) are widely described in other sources (see The List of Recommended Literature) and also in other (special) courses of our company.

The other feature of the financial markets is standardization of volume of transactions (size of contracts) by means of lots. At the Forex exchange market a standard contract (one lot) is equal to 1 000 000 (one million) units of acquired currency. In the reality such volumes are sold very seldom at Forex. More typical situation is when the transaction has a volume of ten (10 000 000 units) or more lots.

Such a volume of deals is not always available for an individual investor. The broker companies that provide their services to Forex (for example, LiteForex), give an opportunity to individual traders to carry out operations at the foreign exchange market Forex providing them with so-called leverage. It goes like this. A trader opens an account in the company (sometimes it is called a secure deposit). This deposit is used as a bail (margin) that provides a guarantee of the client ability to pay to the broker company.

When a transaction is opened, a certain part of means, that becomes a guarantee of the transaction (margin), is frozen on the client’s account. The broker company, from its part, adds means, increasing the sum by 50, 100, 200 or 500 times. Basically, it is a purpose loan provided to the client by the broker company for the full time of life of transaction Some companies provide such a credit at certain interest or charge a certain commission, but LiteForex provides the leverage to its clients for free. The size of the leverage in this case is indicated as 1:50; 1:100; 1:200 or 1:500. Using the leverage, an individual trader may enter Forex having relatively small deposit. Thus if a trader has $10 000, then using the 1:100 leverage, the biggest possible amount of the transaction that is available for him is equal to 1 000 000 (one million dollars).

Picture 2. The work of leverage

Apart from leverage broker companies provide an opportunity to trade using cent accounts and work with fractional lots. In this case a trader gets an opportunity to work with deposits from US$1 (at cent account it is equal to 100 units) that by means of leverage will allow him to open a transaction at volume of 10 000 (0,1 of lot); the transactions at volume of 10 000 or less are called fractional (mini-, micro-) lots. Broker companies cannot lead such micro-transactions at the foreign exchange market separately. Thus in case of work with cent accounts, the consolidated position is led to the market.