A margin account, at its core, involves borrowing to increase the possible return on investment. Investors often use margin accounts when they want to invest in equities by using the leverage of borrowed money to control a larger position than they'd otherwise by able to control with their own invested capital.
To get started, investors interested in trading in the forex markets must first sign up with either a regular broker or an online forex discount broker. Once an investor finds a proper broker, a margin account must be set up. A forex margin account is very similar to an equities margin account – the investor is taking a short-term loan from the broker. The loan is equal to the amount of leverage taken on by the investor.
An investor must first deposit money into the margin account before a trade can be placed. The amount that needs to be deposited depends on the margin percentage that is agreed upon between the investor and the broker. For instance, accounts that will be trading in 100,000 currency units or more, the margin percentage is usually either 1% or 2%.
So, for an investor who wants to trade $100,000, a 1% margin would mean that $1,000 needs to be deposited into the account. The remaining 99% is provided by the broker. No interest is paid directly on this borrowed amount, but if the investor does not close their position before the delivery date, it will have to be rolled over. In that case, interest may be charged depending on the investor's position (long or short) and the short-term interest rates of the underlying currencies.
In a margin account, the broker uses the $1,000 as a security deposit of sorts. If the investor's position worsens and his or her losses approach $1,000, the broker may initiate a margin call. When this occurs, the broker will usually instruct the investor to either deposit more money into the account or to close out the position to limit the risk to both parties.