A:

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.

These margin accounts are operated by the investor's broker and are settled daily in cash. Margin accounts are not limited to equities – they are also used by currency traders in the forex market.

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.

To learn more, see "Getting Started in Forex," "A Primer on the Forex Market" and "Getting Started in Foreign Exchange Futures."

RELATED FAQS
  1. What is a margin account?

    A margin account is an account offered by brokerage firms that allows investors to borrow money to buy securities. Read Answer >>
  2. How much can I borrow with a margin account?

    Understand the basics of margin accounts and buying on margin, including what amount investors can typically borrow for purchases ... Read Answer >>
  3. What is the difference between extensive margin and intensive margin in economics?

    Find out why it is important for traders to understand the difference between initial margin requirements and maintenance ... Read Answer >>
  4. What Does a Share Liquidation in My Account Mean?

    A liquidation occurs when an account's holdings are sold off by the firm where the account was held. Read Answer >>
Related Articles
  1. Trading

    5 Tips For Selecting A Forex Broker

    Discover the best ways to find a broker who will help you succeed in the forex market.
  2. Trading

    Getting started in forex

    Before entering the foreign exchange (forex) market, you should define what you need from your broker and from your strategy. Learn how in this article.
  3. Investing

    How to Choose a Forex Broker: Everything You Need to Know

    Take your time when looking for a forex broker because a bad decision can be costly.
  4. Investing

    Picking your first broker

    If you're a rookie investor, choosing a broker may be your first big investment decision. Learn more on whether you should you go with a full-service broker or a discount broker.
  5. Trading

    The Top 10 Forex Brokers for Beginners

    These ten forex brokers welcome new traders with user friendly educational tools and resources.
RELATED TERMS
  1. Call Money Rate

    The call money rate is the interest rate on a short-term loan ...
  2. Forex Broker

    A forex broker is a service firm that offers clients the ability ...
  3. Broker's Call

    A broker's call is the interest rate charged by banks on loans ...
  4. Marginable

    Marginable securities trade on margin through a brokerage or ...
  5. Liquidation Level

    In forex trading, the liquidation level is the point when the ...
  6. Variation Margin

    A variable margin payment that is made by members to their respective ...
Trading Center