Differences between Forex Trading and Stocks Trading

Margin Trading: Stocks vs Forex

The word “margin” means something entirely different when dealing with the Forex then it does when dealing with stocks. When dealing with stocks a trader can borrow up to 50% of a stocks value. This can be a pretty costly move as the investor pays an interest to the brokerage firm on the amount of the money that he borrowed. This isn’t the case with Forex Trading.

For example, at $100 a share, 100 shares of Yahoo are valued ad $10,000 ($100 x 100 shares) To trade this stock on margin, the trader is required to pay 50% of the amount and the remaining $5,000 is borrowed and interest has to be paid on that amount. Margin interests differ from broker to broker, but typically you can expect to pay an interest of 1-3% or more.

Now, when dealing with the Forex, margin is the minimum required balance to open a trade. When you open a Forex Trading account, the money you deposit acts as collateral for your trades. This deposit, called margin, is typically 1% of the value of the position.

For example, if you want to purchase $100,000 of USD/JPY at 100:1 leverage, the money required is 1%, or $1000. The other $99,000 is collateral with your remaining account balance. You pay no interest. It’s really very important to remember that leverage magnifies your profits AND your losses when Forex Trading. You should monitor your Forex account balance on a regular basis when trading and implement stop-loss orders on every open position to limit the downside risk.

How to Start Forex Trading