Beginner - Forex Vs Stocks Trading

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So what is margin trading?

When they trade on a margin account they can perform trades with a value which are considerably higher than the amount that they have deposited - this is because of something called leverage. Leverage is usually expressed as a ratio so in case you have leverage of 100 then you have effectively got 100:1 purchasing ability (you can buy 100 USD when you only have the funds for one USD). Leverage lets you buy much more of a funds then you would ordinarily be able to afford - but then this is where the word "Margin" comes back in to focus.
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Usually when they as a retail client (or non-institutional client) purchase equities they buy what they can pay for - not 100 times what they can pay for. So with Foreign exchange (margin) trading they can leverage our investments & potentially make much over would otherwise be feasible.

Let's take the example of you purchasing 100 USD as an illustration & let's further imagine that our account has five USD in it. We have bought 100 USD & so one USD of our funds is accounted for - this leaves us with a balance of four USD. If the market moves in our favour then we are making 100 times more funds than they would normally be able to make BUT the opposite is also true. So if they take an outrageous example of the market moving against you by 400 USD then they would have no funds left (our position would be worth 500 USD & our own exposure would be five USD) - & if they assume that the market moves against us by one Cent more then they would not have funds to cover our position & so something called a margin call would happen (the brokerage will close the position or ask you to deposit additional funds - although they would have completed this when they got down to .1 USD own funds left). So that is a brief description of margin trading - why did I mention it?
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When they trade foreign exchange they can go long or short (buy or sell) - that is right, they can sell something that they don't actually have, with equities it is not feasible to go short that is to say in case you require to sell something you require to own it first. With equities there's types of short selling - Bare & covered. Bare short selling refers to the practice of selling something that you do not own & potentially do not have access to, covered short selling involves technically borrowing the equity that you require to sell from someone else (& you pay a premium for this service). At the time of writing bare short selling is not allowed.

 fascinating point to note about short selling is that the investor is trying to benefit from the negative movements in either the market or a specific stock/currency. The technique was banned after the 2008 market crash although it had already been in query since soon after 911.

What about trading strategies?

This has an effect on trading strategies for asset managers, it effectively means they are tied to long only strategies unless their strategies are robust to cover borrowing equities from elsewhere (the premium necessary varies by institution but can be pricey) - Foreign exchange strategies in comparison can include long & short selling with no penalty for short selling. Long only strategies entail the asset manager purchasing equities & then holding them until they make a profit or choose to take the loss - so they don't benefit from market volatility in the same way that Foreign exchange traders can.


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