Expert: Gina Boykin - 7/10/2008

Question
Hello:

Can you explain the following regarding margin regarding a currency account: With an account balance of $5,00.00 and with your leverage* at 400:1 or .25%, your initial margin deposit for this trade is $250.00, leaving your account balance at $4,750.
How is the $250.00 determined?

I thank you for your reply.  

Answer
The margin is actually determined by your lot size, not your account balance.  Since you did not provide the lot size, I will just assume based on the numbers you did give me.  If the lot size is $100,000 and the leverage is 0.25 percent then that means you are required to provide 0.25 percent of each lot that you want to control.  So for each $100,000 you control in the market, you must give $250 (which is 0.25% of $100K).  You can also just divide $100K by 400 (leverage is 400:1).

If you did lot sizes of $10,000 (called mini-lots) then you would only have to provide $25 for each lot you want to control.

Lots, by the way, are just a group of the currency you are investing in.  Just like we invest in shares of stocks, forex investments are done in lots.