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81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

What Is Margin Trading? (2024 Guide)

What Is Margin Trading? (2024 Guide)

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81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

The forex (or foreign exchange) is a financial market where major currencies are bought and sold. Forex trading is always done in pairs; essentially you are always selling one currency to buy another.

To trade forex, the investor will open an account with a broker. The investor can choose to trade on a cash or margin basis. In margin trading, the broker gives you leverage and you have to put down a deposit, or margin.

This article will explore the reasons to consider margin trading, how to calculate margin and will give you an understanding of the risks involved.

A list of the Top Brokers for Margin Trading in January 2024:

  1. Plus500
  2. IG
  3. Admiral Markets
  4. Interactive Brokers

Description of the Best Brokers for Margin Trading in January 2024

1. Plus500

Pros

  • No buy/sell commissions and tight spreads
  • Leverage of up to 1:30
  • FREE unlimited Demo
  • 2,800+ trading instruments
  • Real-time quotes and advanced analytical tools
  • Fast and reliable order execution

Cons

  • No API integrations
  • No social copy trading

Plus500 was founded in 2008 and is considered to be a high-trust broker because not only is it regulated by top-tier bodies like the FCA in the UK and ASIC in Australia, but it is also listed on the London Stock Exchange.

Plus500 offers CFDs, 71 forex pairs and stocks. You can trade using its proprietary platform, which is available as a desktop download, a web trader and a useful, well-designed and streamlined mobile app.

Deposits and withdrawals are fast and free, and you can use a bank transfer, eWallets and credit or debit cards to fund your account.

The minimum deposit is quite high, however, at £100.

The trading fees are about average, so there is not too much cost involved with making trades or maintaining an account at Plus500.

Plus500 does not offer access to platforms like MetaTrader, but it does have a proprietary platform called Web Trader that is simple and easy to use with a range of charting options and trading tools.

For those who like a lot of research in their trading apps, Web Trader and Plus500 as a whole does not provide that much detailed information.

For beginner traders, Plus500 does have a demo account where you can practice trading without risking your own capital, and the Trading Academy has a reasonable amount of educational material in the form of videos, eBooks and articles. There is also a Traders Guide which has some further learning resources.

Visit Plus500

81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

2. Admiral Markets

Pros

  • Highly regulated
  • Advanced trading tools
  • Account protection
  • Low trading fees

Cons

  • No US clients
  • Inactivity fee
  • Minimum deposit of $250

Best for: Advanced trading tools

Admiral Markets, rebranding to 'Admirals', describes itself as a ‘full-spectrum financial hub’.

In practice, Admirals is a broker that offers several forex and CFD trading instruments in most currencies.

Founded in 2001, Admiral Markets is regulated by JSC, FCA, EFSA and CySEC, and offers traders access to both MetaTrader 4 and 5, with the opportunity to have several active accounts with different base currencies to take advantage of price instability.

Like many online brokers, Admiral Markets offers margin trading to its clients.

Margin trading is the practice of borrowing money to purchase assets. In the context of Admiral Markets and other online trading platforms, this typically involves using a small amount of capital to open a position that is much larger in value.

Trading on margin can magnify both profits and losses, meaning that there is a higher risk involved compared to trading with just your own money.

If you are not a UK resident, the conditions might change depending on the regulation. Please, check the Admirals website for details.

Please, be aware that if you want to see UK conditions but you don't have a UK IP address, then you must select Admirals Markets UK at the bottom of the home page.

Visit Admiral Markets

Investments involve risks and are not suitable for all investors. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

3. IG

Pros

  • Highly regulated
  • MetaTrader 4 (MT4)
  • Over 10,000 instruments
  • Available in the UK and US
  • 24/7 customer support

Cons

  • High fees
  • No deposit compensation scheme for US accounts
  • No copy trading
  • Inactivity fees

IG is a great share trading platform for beginners thanks to its user-friendly interface and extensive educational resources.

Pros of IG include a wide range of trading instruments and markets, as well as the ability to access multiple account types and trading platforms. The platform also offers a demo account for beginners to practise trading strategies before investing real money.

However, IG isn’t the cheapest share trading platform, with relatively high trading fees and a minimum deposit requirement of £250 when paying by credit/debit card or PayPal.

In terms of additional fees, IG charges a commission fee for share trading, starting from £8 per trade. There’s also a custody fee of 0.25% per year for holdings of £250 or more.

Overall, IG is a solid choice for beginners looking for a user-friendly platform with extensive educational resources, but investors should be aware of its fees and minimum deposit requirements.

Visit IG

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of IG retail investor accounts lose money when trading spread bets and CFDs with IG. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

4. Interactive Brokers

Pros

  • Regulated
  • Wide range of offerings
  • Low commission
  • Socially responsible
  • 24/5 customer support across multiple channels

Cons

  • No additional platforms
  • Inactivity fees

Interactive Brokers has some of the lowest trading fees available on the market.

This broker is designed for more advanced traders, however. The account opening process is complex, and the platforms are not as user-friendly as others.

Additionally, inactivity fees are high and vary depending on your account balance and age.

They have incredible research and data tools with desirable third-party integrations. Educational materials are extensive and include trading glossaries, online courses, tutorials and webinars.

Interactive Brokers offers phone and live chat support; however, it can sometimes be slow.

Visit Interactive Brokers

What Is Margin Trading?
What Is Margin Trading?

What Is Margin Trading in the Forex Market?

In forex, investors use margin trading to increase possible return on investment.

Using a ‘margin account’, an investor will use their own funds to put forward a percentage of a larger value investment, with the broker putting forward the rest.

Even taking into account fees and commission, the theory is that the larger the sum of money that can be traded, the bigger the profits for the investor.

The margin account is essentially similar to a short-term loan that allows the investor to have a bigger stake in the market and therefore, it is hoped, receive greater returns.

How Does Margin Trading Work?

Margin trading should be seen as a way to borrow money by putting up a ‘good faith’ portion of account equity, rather than as a cost or a fee.

To commence margin trading, the investor opens an account with a broker using the required percentage of the full value of the proposed trade (the margin). The required percentage is calculated to cover any losses should they occur.

The margin is the proportion of the trader’s funds that are set aside (also referred to as ‘used’ or ‘locked up’) for the length of time the trade is open – this is essential to have an open trade.

Every broker will have different requirements, so investors will want to consider all their options before choosing a broker and starting to trade.

When the trade is completed, the margin returns to the trader’s account as ‘freed’, ‘released’ or ‘usable’, and can be used to enter into new positions.

What Are the Benefits of Margin Trading on Forex?

The main benefit of an FX trader using margin is the ability to leverage investments and increase their returns. They can use margin trading to trade in far larger sums of currency than their principal investment would usually allow.

Unlike typical stock brokers, forex brokers don't, as a rule, charge interest on the money they put in.

The margin size is much greater than that found in the stock market generally, with the minimum ratio being 10:1 rather than 2:1, which means FX traders can leverage greater sums.

So for example, an FX trader who starts with £100 as their principal investment, with a 50:1 leverage, can invest £5,000 worth of currency. That presents FX traders with a huge advantage when it comes to realising gains in the market.

Other benefits include:

  • Flexibility and speed in trading. The market can move fast and some opportunities may pass before the trader can release funds. Margin trading allows the trader to have more liquidity to take advantage of more opportunities.
  • An easier way to raise finance. Margin trading can be a useful way to access additional funds.
What Is Margin Trading?
What Is Margin Trading?

What Will the Margin Requirement Be for My Trade?

Margin requirements vary depending on the broker and size of the trade. Typical forex margin requirements can be 2%, 1%, 0.5% or 0.25%. For accounts that will trade in over 100,000 currency units, the margin percentage is usually around 1% or 2%.

Each trade or position that a trader wishes to open will have its own ‘required margin’ amount that is required to be ‘locked up’ or kept to one side.

If the base currency is the same as the account’s currency, the calculation for required margin is:

RequiredMargin=NotionalValue×MarginRequirementRequired Margin = Notional Value \times Margin Requirement

If the base currency is not the same as the account’s currency, the calculation for required margin is:

RequiredMargin=NotionalValue×MarginRequirement×ExchangeRateBetweenBaseCurrencyandAccountCurrencyRequired Margin = Notional Value \times Margin Requirement \times Exchange Rate Between Base Currency and Account Currency

For example, a trader pays £1,000 into their margin account and decides to go long USD/GBP at 1.50000 and wishes to open a position of one mini lot (10,000 units).

The mini lot is worth £10,000 and the position’s notional value is £15,000. If the margin requirement is 5%, the required margin will be £750.

But, if a trader wished to go long on USD/EUR and open one mini lot (10,000 units) and the trading account is a GBP account, the first step is to calculate the USD/GBP price.

If USD/GDP is trading at 1.1000 the notional value is 11,000. If the margin requirement is 3%, the required margin will be £330.

Understanding Key Terms in Margin Trading

What Is Used Margin?

Each position will have its own specific required margin. The broker will add together all of the required margins for open positions and that total sum is the used margin.

What Is Equity?

Equity is another word for the value of your account in real time. If you have no open trades then ‘equity’ equals the balance. If you have open trades, ‘equity’ is the account balance plus the floating profit (or loss) of all your open positions.

What Is Free Margin?

The free margin is the difference between equity and used margin and can be either:

  • The amount a trader has available to open new positions
  • The amount that existing positions are able to move against the trader (i.e. downwards) before the trader receives a margin call or stop out.

What Is Margin Level and Margin Call?

The margin level is a percentage value calculated by the ratio of margin to available equity. It is used by the broker to determine whether an FX trader can take a new position.

It is calculated by assessing the accessible usable margin against used margin:

MarginLevel=(Equity/UsedMargin)×100Margin Level = (Equity/Used Margin) \times 100

The limit applied varies from broker to broker but it is most common to set the limit at 100%. A 100% margin level is when account equity is equal to margin.

If a trader’s account reaches the margin level (for example, the FX trader will no longer be able to cover any continued or potential losses), the broker will make a margin call and the trader will not be able to take any new positions.

If the trader continues to have losing positions, the stop-out level will be reached. The stop-out level is the defined point that a broker will close a trader’s active positions. The broker can no longer support the open positions due to the decrease in margin levels.

It is possible to avoid margin calls being made by careful monitoring of the account balance and minimising risk when considering positions.

What Are the Risks of Margin Trading?

There are several risks to margin trading on forex:

1. Systemic Risk

The main risk of margin trading on forex is systemic risk; for example, the risk that the whole market may be affected by something outside of its control and, at the most extreme, may cause the entire financial system to collapse.

Systemic risks can include:

  • Financial decisions such as inflation, growth, interest rates, etc.
  • Conflict, war, terrorist attacks, natural disasters
  • Strikes, political conflicts and elections
  • Regulatory and legislative changes

2. Leverage Risk

The higher the leverage the greater the money made, but also the greater the risk of loss. A broker may offer high leverage (some may go as high as 400:1) but traders do not have to use that level of leverage.

3. Liquidity Risk

In general, forex is a reasonably liquid financial market but even forex is susceptible to periods of low liquidity. Bank holidays and weekends can even cause a dip in liquidity – and during these periods, the cost of trading will increase.

Final Thoughts

Forex margin trading brings both benefits and risk to traders. With careful management, a trader can take advantage of high leverage offered by brokers to make rewarding trades, but like any kind of financial investment, traders should ensure that they are knowledgeable of the entire system, including associated risks, before committing to spending large sums of money on margin trading.

Forex is a reasonably liquid market and accessible to traders with relatively modest amounts of capital. However, margin trading on forex with modest sums is unlikely to reward traders with enormous fortunes. As with any investment, the higher the capital spend, the bigger the rewards; but this also brings the greatest risks.

WikiJob does not provide tax, investment or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.


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