What are margin requirements?

Margin requirements define how much capital is needed to open and maintain trading positions. This article explains what margin requirements are, how they are calculated, and why they matter when trading with Weltrade.

One of the ways for the banks (or other large financial institution) to make money is to exchange large amounts of one currency into another and then change it back.

For example, EUR vs USD is traded at 1.13457.

A bank has 1,000,000 EUR and sells it at 1.13457 USD per each (gets 1,134,570 USD).

After a while EUR vs USD is traded at 1.13420, so, the bank takes 1,134,570 USD and exchanges them into EUR (and gets 1,000,326.22).

Bank's profit here is EUR 326.22(=1,000,326.22-1,000,000).

Usual mortals (retail clients) don't have millions to do the same, so margin trading was introduced, when a user doesn't have to actually HAVE a million to exchange it, he can have a small fraction of it (can be less than 1% of that million).

This "fraction" is used as a certain collateral and is the necessary minimum to start trading with this particular volume (1 mln in our example). Also it's known as "margin requirements".

In case margin requirements are 1% - it means we need to have only 1% of the volume we want to deal with in our balance.

1% is 1/100, so, "100" here is called "leverage".

The wording is: leverage of 1:100.