Tag: margin account

A Cash Account And A Margin Account

Investors that are buying securities do that by using brokerage accounts.

There are two main types of brokerage accounts but they are not the same, there is a difference between a cash account and a margin account. The most obvious is in its monetary requirements.

What is a cash account?

When using a cash account, all transactions have to be done with cash. In investing this represents a long position. As an investor, you must deposit sufficient cash to settle the trade. The other way to trade in a cash account is to sell your existing position but on the same trading day. Only then you’ll have available cash to settle the trade.

A cash account is quite simple.

With your permission, all or part of shares you own and hold on a cash account a broker can lend to the third party. This could be a smart decision since it could provide you the extra gains. This situation is known as share lending or securities lending. Moreover, if you hold the securities that are hard to borrow, your profit could be even more significant. There are always a lot of short-sellers that are in need of good stocks but don’t have enough money to buy them. Also, hedge funds are always interested in borrowing securities.

What is a margin account?

When you open a margin account you’ll have a chance to borrow and buy a new position or sell short. Actually, by using a margin account you’ll leverage your position and profit from betting against the value of the assets in the account. You can also use a margin account to withdraw cash. It would be some kind of loan. If you want to leverage your position, a margin account could be useful.

For example, by using a margin account you could take a short position in the stock that you believe the price will fall soon. When it happens, you’ll cover your short position by taking a long position in the same stock. This could be beneficial if the market goes in your direction because you’ll take profit on the difference between the cost of the initial short sale and the cost of stock bought at a lower price for your long position.

Where is the difference between a cash account and a margin account?

If you use a cash account for this action, you’ll need some strategy to hedge the income because you can use only cash for long positions. For example, you may set a stop order to sell the stock if it falls below a specific price. That will limit your downside risk.
On the other hand, a margin account must keep a certain margin ratio all the time. If the amount on your account drops below the limit, your broker will issue a margin call. This means, your broker will demand more securities or cash in order to get back the account value within determined limits. To maintain this amount you’ll need to add fresh cash or to sell some of the securities you already hold.

The key difference

To put a long story short, the main difference between a cash account and a margin account is that cash accounts don’t allow you to use the vast range of financing vehicles. You’ll not get a chance to borrow for investing. If you want that, you’ll need a margin account. Also, there are some other circumstances where you’ll choose to use a margin account. It isn’t convenient for investing only.

Opening a margin account means a credit arrangement with a broker. The benefit is that you can use the margin in various different ways.

What a margin account allows you?

The most important, a margin account allows you to borrow against the value of your stocks and make more investments. A margin account gives you the leverage since you can buy more assets than it is possible with the cash you have. Yes, the broker will take an interest in the margin loan. Limits on a margin loan may vary from broker to broker. But most of the brokerages will allow you to borrow up to 50% of the worth of your investments. Also, talk to your broker because not all your investments are fit for margin requirements.

Here is one example of the difference between a cash account and a margin account.

For example, you have $20.000 and want to buy a stock at $200 per share. So you have enough cash to buy these 100 shares. But if you have a margin account your broker could allow you to borrow an additional $20.000 which means you could buy 200 shares of that stock. Of course, you’ll own the broker $20.000 but you’ll borrow that money only if you believe the stock will rise in value. So, you’ll earn from selling them. That will be your profit after you give back a borrowed amount to your broker.

The risks of a margin

For example, your position falls in value, and you end up with large. In such a case the broker can demand you to close your position. No matter if you don’t want to do it. That is a great risk with a margin account.
Let’s use our example above. You bought 100 shares of stock at $200 but the stock suddenly falls to $100 per share. In the cash account, your 100 shares will be worth $10.000 instead of $20.000. In this scenario, with a cash account, your losses would be $10.000.
But if you have a margin account and purchased 200 shares by taking out a margin loan of $20.000, you’ll be in bigger problems.
First of all, you bought double as much stock, so your losses are double bigger. Moreover, your broker will notice that you owe a $20.000 margin loan on assets but now your assets worth only $10.000. So, our broker might request you to add more cash. If you don’t do that, the broker will sell your stock at $100 per share. Your losses will be locked but you’ll have no chance to cover them if the stock rebounds. That is also a difference between a cash account and a margin account.

Bottom line

By having a difference between a cash account and a margin account in mind you might choose to stick to your cash account. Why should you be worried about margin? But it could be the wrong decision. A margin account offers you more options but you have to check the volume of leverage you use. The other key rule is to never put your complete account at risk.

Understanding the difference between a cash and a margin account is a tricky part for beginners. However, if you know the risks, everything will be well

4th June 2020
How to Make Money With Forex?

Forex market is like any other market where instead of stocks or bonds people trade currencies and make money.

Trading in Forex is popular low capital trading but you have to know how to make money with Forex. The truth is that you don’t need a huge capital to get started. Also, the Forex market is available 24 hours during working days, but you can’t trade over weekends. Maybe the most common truth about every single person that enters the Forex market is that they are excited, eager to earn a lot, and fast, but only a few of them know how to make money with Forex.

How beginners in forex trading look like?

They are excited by the possibility of quick money earning and becoming rich. Beginners will easily sign up on some platforms without doing the necessary research. They are entering a position like gambling putting money somewhere and somehow, random, without a strategy. Even more, they don’t know how to place a trade, when to enter the position, where to set stop-loss orders or limits, or take profit. Actually they know nothing. And what happens? After several days when everything invested is lost, they will conclude the Forex is fraud and it is impossible to make money there. For them it is completely the truth. With this approach, they will never earn because they don’t know how to make money with Forex.

The other side of the Forex rainbow

Beginners could see successful Forex traders. But they are using tested and well-checked strategies. The strategies that they have developed or discovered thanks to a lot of trials and errors made for a long time. Yes, that’s the way! You’ll have to make many trials and mistakes to understand forex trading and understand how to make money with Forex.

Forex traders have a unique trading style, a unique system, and their own strategy. But they came up to them after deep research, hundreds of attempts, losing a lot of money before they found a profitable strategy that works for them and became successful traders. Well, we are sure that the most successful traders will never talk about their failures but now and then you can find someone ready to share that unpleasant experience. On the other hand, you’ll find a lot of them sharing their great stories about winning trades. Learn from them. Only the knowledge will allow you to make the proper strategy, consistent profits on it every single day. That is possible, of course. But you have to learn how to make money with Forex. And here are some hints.

How to make money with Forex?

If you are a complete beginner without knowledge but willing to start Forex trading and make money from it, the first thing you have to do is to read reputable books. Sorry folks, but knowledge is MUST. The point with reading books is that you’ll obtain theoretical knowledge. It is extremely important to understand the financial markets, otherwise, you’re not able to trade them especially if you want to stay there for the long run.

Good places for sharing knowledge are social networks. Join as many groups as you can and start the conversation. Don’t be shy to ask whatever you need to get better knowledge. Professional traders are also members of such groups and often, they’ll be glad to answer you. Also, interact with other rookies and share your knowledge but dilemmas also. Ask elite traders about the effects of leverage. That could be a very interesting conversation where you could find that trading with excessive leverage could be dangerous. You don’t believe it? Well, using leverage is good but if you use excessive leverage in your trading strategy that can end up as a failure. Using excessive leverage might mean that you are not realistic in expected returns on your investments.

What is leverage in Forex trading, in the first place?

In general, leverage enables you to increase the result of your trading efforts but without developing your resources. Leverage in Forex will simply boost your account while you actually don’t have that money. You are borrowing it to trade with even 1.000 times greater amount than your capital is. That is giving you access to the larger volumes than it is possible with your initial capital.
We are sure that you noticed banners on the trading websites that offer trading with 500:1 leverage. Well, it’s time to explain this in more detail. As we said, leverage is a kind of loan that a broker gives you. You use leverage in margin trading. And here we come to an important point. But leverage isn’t quite a loan even if it is one of the highest that traders can take.

This thing goes right this way

When you enter the forex market, the first thing you have to do is to open a margin account with your broker. Depending on the broker, the amount of leverage can be 20:1, 50:1, 200:1, 500:1 even more. Also, the amount of leverage will depend on your position size. For example, a 100:1 leverage ratio indicates that you have to deposit on your margin account, let’s say, $1.000 to be able to trade $100.000 of currency. These 100:1 leverage or 50:1 are for the standard lot size. If your position is at $50,000 or less the leverage would usually be 200:1.

But compare these leverages with, for example, the 15:1 leverage in the futures market. Well, you might think this forex leverage is too risky. Keep in mind that currency values normally switch by less than 1% within one-day trading. So, this huge leverage is possible because of small changes in the prices of currencies. If currencies are changing more in price, the broker would never give you that much leverage.

More math on how does Forex leverage work

Assume you have a small account with $1.000. A standard lot is 100.000 currency units. If you want to trade mini or micro-lots, this deposit size would allow you to open micro-lots. That is 0.01 of a single lot or 1.000 currency units with no leverage set in place. Nevertheless, you’re looking for a 2% return per trade, which is $20.

So, you decide to employ financial leverage to trade big. Your broker is giving you a leverage 200:1. This means you can open a position as large as 2 lots. To make the long story shorter, let’s do some math.

$1.000 x 200 leverage = $200.000

This equitation shows that you actually have a maximum size position of $200.000. That is 200 times the size of your deposit. So, instead of earning $1, you’ll earn $200. Also, you can lose even faster.
Let’s follow our example, and assume you opened an order with a 1.00 lot. What will happen if the market goes against you? You will have minus 100 pips and lose $1000. Your order will be automatically closed. So, you will lose only your total deposit but you’ll not have money to continue. That’s why it is better to trade a smaller position to reduce the risks.

Use a stop-loss order to reduce risk

This one is probably most important. You can find hundreds of Forex courses on the internet that promise you a strategy that will show you how to make money with Forex every day. A lot of them are scammers, trust us. They just want your money for the low-quality courses. The better way is to start with some simple and easy strategy. It’s not hard to build a suitable strategy.

For example, you notice that the EUR/USD currency pair will rebound from a current support or resistance level. Your first strategy should be to take the benefit of this trend. Later, you can adjust this first strategy by adding some details that will improve efficiency. For example, set a stop-loss when the price goes down to a particular percentage or number of pips to exit the position.

Here is what you have to look out when creating a Forex trading strategy.

Firstly, choose the currency pair. Pick it from the market you know, for instance, avoid currencies from exotic countries if you don’t know them well. If you trade only one currency pair you’ll have better chances to recognize trading signals. Also, your position size will determine the risk you are willing to take in every single position.
Further, find when to set your entry, will you go short or long. Never forget to set the exit level. You must know when to exit the position to maximize your profit and minimize potential losses.
Find when and how to buy or sell your currency pair.

Can you become rich with forex trading?

Some will tell you that it is impossible. And they would be right. The others will tell of course, and they would be right, also. The truth is that the Forex market may give you a chance to earn a lot. This market is much bigger than the stock market, for example. Also, it offers the highest leverage possible in any market. Also, you can trade every day. In essence, the Forex market is a place where small investors with small capital have a real chance to make fortune.

Trading forex is easy, but trading it with constant profit is difficult.

Opposite to what you’ve heard or read Forex trading will not turn your $1.000 account into $1 million. The amount you can earn is determined by how much risk you want to take. If you want to know how to make money with Forex, start with education. Sorry guys, it is necessary. When you learn the basics you can develop your skills further and you’ll start to make money for living by trading forex.

There are traders that are targeting even 100% profit per month. Yes, but the risk they are taking on is almost the same as the profit they are aiming for. In short, if you want to make a 100% profit per year, it’s possible to have a loss of 100% per year. Even if you are trading with an edge your profits will be small without leverage. On the other hand, with leverage, you can profit a lot, but you can produce extreme losses. The main point in forex trading is to buy a currency pair at a lower price and sell it at a higher price. The difference between is your profit.

For example, you have $1000 on your trading account and want to trade the EUR/USD pair with the exchange rate at 1.25. That means that for 1 euro you’ll take $1.25. Keep in mind that the prices are changing every day, from minute to minute. But you believe that EUR will increase versus the dollar.

Let’s assume, you buy 800 euros for your $1000. And the exchange rate changed from 1.25 to 1.35. That’s good for you, and you close the trade at this level and you can exchange your 800 EUR back to $1.080, and your profit is $80. But, if you used the leverage of 1:3000 you would get $24.000 in one single trade. So, you invest $1000 and trade $3.000 000! Pretty good!

Always keep in mind, if you want the higher profits you’ll have to take the higher risks.

Bottom line

One thing is completely true. If you never try you’ll never know how to make money with Forex. With an account with just $1.000 and leverage of 1:100, it is possible to make a lot of money in a single trade. All you have to do is to have at least 1% of the trade on your margin account to use this leverage which is one of the most profitable. That is how to make money with Forex.

27th May 2020

Tag: margin account

A Cash Account And A Margin Account

Investors that are buying securities do that by using brokerage accounts.

What is a cash account?

What is a margin account?

Where is the difference between a cash account and a margin account?

The key difference

What a margin account allows you?

The risks of a margin

Bottom line

How to Make Money With Forex?

Forex market is like any other market where instead of stocks or bonds people trade currencies and make money.

How beginners in forex trading look like?

The other side of the Forex rainbow

How to make money with Forex?

What is leverage in Forex trading, in the first place?

This thing goes right this way

More math on how does Forex leverage work

$1.000 x 200 leverage = $200.000

Use a stop-loss order to reduce risk

Can you become rich with forex trading?

Bottom line