Many forex traders use what is known as margin accounts. These types of accounts essentially allow a trader to borrow from a broker in order to increase the potential of return on investment. This enables traders to control a larger capital position than they would otherwise be able to control using their own money to invest.
Prior to being allowed to trade an investor must first deposit funds into his or her margin account. The required deposit amount will be agreed upon between the trader and the broker. Usually for accounts trading in 100,000 units of currency or more, brokers require either 1% or 2%. Therefore, a trader who wishes to control $100,000 of trading capital, he or she would be required to have $1,000 deposited into the forex account.
Interest Charges and Payments
The trader does not pay any interest directly on the amount borrowed, however if the trader does not close a position prior to the delivery date, this will require the position to be rolled over. This can result in interest being charged, depending upon short-term interest rates as well as the trader’s position. In some cases interest payments are received by the trader if he or she is in long position on a currency with a higher currency against a lower interest rate currency.
On the other hand, trading large amounts of capital on margin can be risky. The potential to gain larger profits can come with the risk of larger losses. If a trader’s position continues to worsen the broker may decide to initiate a margin call at some point. This means the broker will instruct the investor to either close out his or her position or deposit more funds into the account. Therefore, it is important for forex traders to practice proper risk management.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.