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    What is margin?

    3 Minutes
    Updated Mar 1, 2024 02:45

    What exactly is initial margin? and how does it work?

    Margin is not a cost; however, Margin is the amount of capital required in your Account for you to start a Transaction. Each time you open a new position, a certain percentage of the capital or balance in your account will be withheld as the margin for the opening of the new position.

    For example, to control a $100,000 trade position, the broker will set aside $1,000 from your account as initial margin. This also means, you’re controlling a trade position of $100,000 with $1,000.

    Margin is NOT a fee nor transaction cost. It simply is the portion of funds that the broker sets aside from your account balance to keep your trade open, and to ensure that you can cover the potential loss of the trade.

    The margin amount will only be “locked” for the duration of the trade. Once the trade is closed, the margin will be “released” back into your account for taking on new trades.

    How to calculate initial Margin?

    The price of the currency pair, your trading volume, and your margin dictate the margin level you need to reserve for each trade. The amount of the margin is usually indicated in the base currency.

    Margin = current contract value * margin ratio (%).

    Suppose you open a 200:1 leverage or 0.5% margin trade. If you open a mini-lot position with your margin, you don’t have to use the full $10,000; you only need to provide a margin of $50 ($10,000 × 0.5%=$50). 

    Maintenance Margin

    Maintenance margin is the minimum funds required in your account to hold a trade position. It is also known as “free margin”. 


    Understanding Maintenance Margin.

    In order to maintain your open trades, you are required to keep sufficient funds in your account to meet the maintenance margin. This is a requirement to maintain equity equal to or above 50% (or as amended on the website from time to time) of the total initial margin paid on the entire account.

    If equity falls below the maintenance margin level, the broker will be entitled to close out your positions.

    How to calculate Maintenance Margin

    Maintenance margin = real-time contract value * maintenance margin ratio (%).
    Maintenance margin ratio (%) = margin ratio (%) * 50%

    For example; if you have paid $1000 in initial margins, your equity must not fall below $500.

    If your trade starts to make a loss, then your initial margin may no longer be enough to to keep the trade open. In this instance, the broker will ask you to increase the funding in your account, this is called “Margin Call”.

    Assuming the number of trades didn’t change, you may meet the maintenance margin with the $1000 already paid as initial margin. However, should your trades deteriorate to an equity of $400, you will need to deposit an additional $100.00 to bring your account equity back to the maintenance margin level.

    Summary

    • Margin or Initial Margin, is the “security deposit” required for you to open a trade position.

    • Maintenance Margin or Free Margin, is the minimum funds required in your account to keep your trades running.

    • Margin and Leverage goes hand-in-hand, it will amplify both gains and losses. In the event of loss, a margin call may be executed by your broker to liquidate positions without prior consent.




    * The content presented above, whether from a third party or not, is considered as general advice only.  This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.