One of the features which attract investors to spot currency trading is the fact that it is done through a margin trading system which allows investors to maximize the returns for their investments. For example, under the margin trading system, a trader with just a $5,000 deposited in his account can buy or sell up to $500,000 worth of currency contracts. Let us examine how this is possible.
According to wikipedia, ' a margin is a collateral that the holder of a position in securities, options, or futures contracts has to deposit to cover the credit risk of his counterparty (most often his broker).
In online spot currency trading, the buying and selling of currencies are done in tranches or by lots of $100,000 each. When a trader opens an account with a broker, his initial margin deposit serves as a collateral to cover future losses which the trader may incur in the course of his trading activities. In exchange for the margin deposit, the broker extends a credit line to the trader equivalent to 100 times his margin deposit (200x for other brokers). The trader can then trade up to 5 lots or $500,000 worth of currencies. Profits and losses are computed based on the number of lots the trader has bought or sold.
