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Spreads and Margin

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Spreads and Margin

Trading in financial markets has its own language, so before you start work, you need to understand the basics. One of the most important terms, and perhaps the most complex, refers to spreads and margins. Although there are many variables, but this is a very simple explanation of how margin works and the potential for profit or loss.



Spreads

If you look at the difference between the purchase (buying) price and the selling (selling) price, the difference is called the spread. If the GBP / USD market rate is 1.34550, the purchase / sale price can be displayed as 1.34540 (bid) / 1.34560 (demand).
This is a 2.0 pip spread, which means that you are buying 1 pip below the current market rate, and you will need to change your investment to go beyond 2 pips to make a profit in your trade. Many brokers say that they offer narrow spreads, which is a narrower gap between the market rate and the purchase / sale price.
Since the spread is where the brokers make their profits, and with a very narrow spread, it is likely that they will also take over the commission on the total amount of your transaction. Depending on the size of your transaction, it may be more profitable for you to pay a fixed fee (for larger transactions) or choose to pay the spread for smaller transactions.



Margin

With a margin, you can place trades at full value using a smaller amount as a deposit. When you open your trading business, the amount you deposit into your trading account will be used as a margin for trading. If your trading account was $ 1,000 and your leverage was 10: 1, you could open a trade for $ 10,000. You do not need to use all margins in a single transaction.
Now you are investing in stocks in the amount of 10,000 US dollars, and their value increases by 10%, and the total value is 1,000 US dollars. Your promotion is now worth 11,000 dollars. When you close a deal, you make a profit of $ 1,000 with a margin of $ 1,000, which is 100% profit.
However, if you placed the same transaction, but the stock fell by the same amount of 10%, you will lose 1000 dollars, that is, all the margin you invested in the transaction.