Forex margin and securities margin are two very different things. Understanding the difference is important.
In the securities world, margin is the money you borrow as a partial down payment, usually up to 50% of the purchase price, to buy and own a stock, bond, or ETF.
This practice is often referred to as “buying on margin”.
So if you’re trading stocks on margin, you’re borrowing money from your stockbroker to purchase stock. Basically, a loan from the brokerage firm.
In the forex market, margin is the amount of money that you must deposit and keep on hand with your trading platform when you open a position.
It is NOT a down payment and you do NOT own the underlying currency pair.
Margin can be looked at as a good faith deposit or collateral. Is is used to ensure each party (buyer and seller) can meet their obligations of the agreement.
Unlike margin in stock trading, margin in forex trading is not borrowed money.
When trading forex, nothing is actually being bought or sold, only the agreement (or contract) to buy or sell is exchanged, so borrowing is not needed.
The term “margin” is used across multiple financial markets.
However, there is a difference between how margin is used when trading securities versus when trading forex.
Understanding this difference is essential prior to trading forex.
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