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The Concept of Margin Trading  


The Concept of Margin Trading

HY Investment offers direct access to the worlds international financial markets. A key advantage to HY investment products offering is that all transactions are traded on margin. This means that for a small amount of money, investors can obtain exposure to a much larger trading position.

Margin is a good faith deposit giving the investor the right to buy or sell the value of the underlying contract of an investment product. For instance, with a deposit of $1000 an investor can gain exposure to $100,000 worth of an investment product.

Here is a simple example:

An investor wants to buy a property with a value of $1,000,000, however he has only $10,000 cash available. He puts this down as a deposit on the property and borrows the rest from the bank. Therefore, in effect the client owns $10,000, or 1% of the property and the bank 99%. One year later this property is worth $1,010,000. If the customer had paid the total purchase price from his own assets, he would have made a 1% gain in his investment. But, since he had only put in $10,000, he has, in effect doubled his money. His investment of $10,000 in the property which by now has risen in value by $10,000 means he has achieved a 100% profit.

This same concept is applied to investing on margin via HY Investment. The client lays down a deposit in good faith, and HY Investment, in effect lends the client the money to trade with.


Why would HY Investment do this


HY Investment conducts this type of transaction for the same reason bank does. When it finances you with this money, it applies certain minimal fees which give it an income. Furthermore, as HY Investment is a large financial institution, it has spare capital in which to offer its clients.

It is important to note that all transactions with HY Investment are done on a margin basis. This is a key advantage when trading with HY Investment.

With HY Investment you can only loose the amount of capital you have on margin. This means that there is no negative margin. This is a huge benefit to investors as you get all the upside of margin trading with a limited downside.


What are the advantages of trading on margin


The principal advantage of trading on margin is that the client can have a far greater exposure to the market, and hence greater profit potential than would otherwise be available. Trading in these larger volumes, in turn allows investors to take full advantage of small price movements.

For example, a 3% move in the clients favor of the underlying value of the US Oil contract offered by HY Investment would result in an approximate profit of 60% of equity. This application is c
called leveraging (or gearing) and is the key to trading these volatile markets.


Initial margin requirements:


At the time of any trading decision made to buy or sell, the customer must have sufficient margin funds as collateral for that purchase or sale in his account. The minimum initial margin for one contract is $1000 for most products but some require up to $3500. If the customer does not have the required amount of funds in his account at the time of the trade, he will be unable to take this position.

HY Investment Trade Center platform automatically lets you know the margin requirements before you make the trades so you can just decide on whether or not to place the trade



Examples of a margin transaction


Client A has $4000 in his account. He wishes to trade the US Oil product offered by HY Investment. The margin requirement of US Oil is $3500 per lot. After much research he decides the price of USoil is ready to go up. He buys one lot of US oil at $58.00. The transaction is as follows:


Day

US Oil Price

Account Equity

Remarks

 

 

 

 

1

$58.00

$4000

Opening Transaction

2

$57.80

$3600

Equity has eroded, but still above the maintenance level.

3

$57.50

$3000

Equity is below the $3500 maintenance level. Margin call would be issued for $500, to build the equity back up to the margin requirement of $3500

4

 

$3500

Equity of $500 as margin called deposited AM

4

$58.50

$5500

Equity increased due to the price of US Oil moving in the direction wanted by the client. There is now free effective margin of $2000 ($5500 - $3500) available for withdrawal or to use as margin new positions

5

$59.00

$6000

Equity increased due to the price of US Oil moving in the direction wanted by the client. There is now free effective margin of $2500 ($6000 - $3500)

6

 

$4500

Client withdraws $1500 from account in AM

7

$58.50

$3500

No Change in status. Equity has fallen, but still above the needed maintenance margin level

8

$59.00

$4500

You close out the position at the end of the trading day.


The accounting in this transaction works in this way: the client paid original margin of $3500 and an additional $500 of maintenance margin. That totals $4000. The customer withdrew $1500 on Day 6 and had a total equity of $4500 after the closing transaction. That totals $6000. The customer therefore received $2000 ($6000 - $4000) for his efforts.

We can see that throughout this transaction any and only funds in excess of the required minimum margin level were free and available for withdrawal or other use. This is an important feature of margin trading.

A quicker way to calculate the customers profit is to compare the opening and closing prices of the US Oil contract. The customer bought US Oil at a price of $58.00 and closed this contract at $59.00. The difference between the buying and the selling price is $1, or a gain of 100 points. At $20 per point, that is $2000 he has made.

The Concept of Margin Trading    |   Order Types    |   Understanding Account Statements


 
Risk Warning: All Forex and CFD trading involves significant risk to your capital. It is possible to lose more than the amount deposited. These products may not be suitable for everyone. You should ensure you understand all of the risks and seek independent advice if necessary. Risk Warning & Disclaimer
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