FC Prime Markets

Margin and Leverage

Margin and Leverage

The concept of margin trading

A key advantage of trading with FC PRIME Markets is that all transactions are traded with margin. This means that for a small amount of money, investors can obtain exposure to a much larger trading position hence a possibility of making a large profit with a relatively small stake, and benefitting from potentially large ROI. This works by a process known as leverage.

Leverage (also known as gearing)

The idea of leverage – i.e. the use of debt to increase the expected return on your capital outlay has the distinct advantage of depositing less to gain greater exposure to a market than if you were to make a purchase in your market through a stockbroker or any other share-dealing service. Despite a small percentage of the value of the trade being required, the investor still realizes profit or loss equivalent to 100% of the trade size. Trading in these larger volumes in turn allows investors to take full advantage of small price movements. 

How does it work?

Let’s look at 2 examples:

You think the price of TESCO stock will rise. You can undertake traditional share transaction and physically buy 200 shares of TESCO trading at US$165.00 per share. This would require $33,000 ($165 X 200 shares), not including any commission charged by the broker. You were correct and the price goes up to $185 per share, so you sell your shares making $20 profit per share and therefore realizing $4,000, (approx 12% profit on your investment).

Now, when you trade on margin with companies such as FC PRIME Markets, you take a position on the price of TESCO, and put up a small portion of the underlying value, (known as margin requirement or risk amount), without buying the shares outright. In this example, you take a Buy position of 200 shares at $165 per shares and the minimum amount required for this trade is $3,200. The price goes up to $185 per share and you close your position and you still make $20 per share profit and realize $4,000, (125% profit on your investment).

In summary, the major difference is that the physical share trade requires payment of the full US$33,000 (plus commission) to enter the trade, whereas with margin trading you take a position of equivalent size and only deposit US$3,200, therefore accessing higher exposure and higher potential returns.

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