Leverage in Forex vs Securities Trading
This article aims to clarify how leverage and margin differ between forex spot trading and securities trading.
Forex Margin and Securities Margin are two different things
In securities trading, margin is the money you borrow from the stockbroker/bank as a partial down payment along with an interest charge. If you are buying stocks on margin, you are essentially taking a loan i.e., borrowing money from your stockbroker/bank to purchase a larger quantity of the stock. You will also be liable for any interest repayment associated with this loan.
In forex spot trading, margin is the amount of money that is deposited with your trading platform as a collateral to enter a trade position. There is no exchange of physical currencies and traders are only entering into contracts to exchange a specified volume of currency at a specified price. It is not a downpayment and you do not own the underlying currency pair.
The use of Leverage in Forex Trading
For example, to buy or sell $100,000 of EUR/USD without leverage would require the trader to put up $100,000 in funds. However, if the broker offers a margin requirement of 2% (or leverage ratio of 1:50), only $2,000 would be required to open and maintain a $100,000 EUR/USD position. In this case, the margin is used as a good faith deposit or collateral that is used to ensure each party (buyer and seller) can meet their obligations of the agreement.
Conclusion
Unlike margin in stock trading, margin in forex trading does not mean it is borrowed money. When trading spot forex, only the agreement (contract) to buy or sell are exchanged, and no borrowing is needed.
Fund Manager,
Salzworth Global Currency Fund
Zhi Xin is part of the Salzworth FX team and is focused on sales and business development efforts for the Salzworth Global Currency Fund. Prior to joining Salzworth, she was in the Vistra Alternative Investments team leading their SEA regional business development efforts in launching new fund structures and providing fund administration solutions. Zhi Xin started her career at Bank of America Merrill Lynch in Singapore, where she served on their FX and Money Markets desk. With a decade’s worth of experience in the industry, Zhi Xin provides deep expertise in alternative investments and fund management.
