“3 Min Guide” What is FX, Leverage, Market Price, Prime Brokerage and more?

May 28, 2016

3 Minutes and you will know the "Margin FX".

“3 Min Guide” What is FX, Leverage, Market Price, Prime Brokerage and more?

Trading foreign exchange (also known as Forex or FX) on margin gives investors more buying power, by allowing them to control large amounts of currency with a small deposit.

“Forex = Foreign Exchange” is…

FX involves the purchase of one currency with the simultaneous sale of another.

Speculators gamble that one will either rise or fall against the other and “buy” or “sell” to profit from that movement.

These currency pairs are usually less volatile than other markets such as equities, so many investors leverage their capital to increase their return from these smaller market movements.

“Leverage” to let you Invest Big

Establishing a margin account with an FX broker enables you to borrow money on a short-term loan.

Before you can begin trading, you place a deposit into that account. The amount of borrowing power that gives you is the leverage.

For accounts that will be trading in 100,000 units of currency, the margin percentage is usually either 1% (100:1 leverage) or 2% (50:1 leverage), depending on the individual broker. So if you wanted to trade £100,000 on a 1% margin you would have to have at least £1000 in the account. The broker provides the other 99%.

Of course “Must Know the Risk”

Trading in these much larger amounts clearly provides an opportunity to amplify profitsbut it can also lead to large losses as well.

When controlling £100,000, a movement of just one penny against you would wipe out that £1000 deposit.

In that case the broker may make a “margin call” instructing you to either put more money into the account or close out the position to limit the risk.

However, there are ways of curbing those losses.

Stop loss orders will automatically close your position if the value of the currency reaches a pre-agreed point, allowing you to limit losses to a specified amount while still allowing potential profit taking.

“Market Price” comes from Banks

Many Online Brokers offer market makers the opportunity for risk-free profitable trade by taking the best prices from banks and offering them on to end users with a margin.

It is rather like a shopkeeper’s role in the chain from wholesaler to customer – but with the invaluable bonus of not having to pay for the stock on the shelves.

Whether you are interested in currencies or commodities, an engine within Trading Server’s systems gather and aggregate the prices streamed constantly from a wide range of banks.

It instantly and continuously sifts through them all to identify the best price, the best bid and the best offer in real time.

This enables our market makers to provide that price with a little extra spread to the end user. It then trades all the way back to the bank actually making the offer.

Therefore, the market maker profits without having to be the principal carrying the risk.

What is Prime Brokerage?

Prime brokerage is a bundled group of services offered by investment banks and securities firms to special clients such as hedge funds, market makers and other specialist and professional investors.

One of the principal business advantages of using a prime broker is the access to a centralised securities clearing facility.

The services provided usually include securities lending, financing for leverage, cash management and operational support.

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Hercules