What is Leverage & Margin?

Currencies are available for trading in fixed lot size from brokers

For example

your trading account is mini account and you decided to purchase 10,000(10k) Euro because lot size is fixed in mini account that mean you can purchase minimum 10,000 Euro at once.
There is different fixed lot size for different account for example (10k)10,000 units are fixed for mini account and (100k)100,000 units are fixed for standard account.

Now we discusses about lot price

First we discusses open market (money changer) example because you’re most familiar with money changer shop and it is easy to understand.

Let’s suppose you have Pakistani rupee in your pocket and you want purchase 10,000 Euro. You ask to money changer that what is Euro buying price against Pakistani rupee.Money changer check the live present exchange rate of pair EUR/PAKrupee.                                                            
              
                   Pair                                      Exchange rate
                                                            Buy price / sell price

        EUR/PAKrupee                       126.587  / 125.587   

  

Here you see a pair with two exchange rate one is buy price and second is sell price. Different between buy price and sell price is called spread. Spread is income of money changer or broker income if you’re doing online forex trading. In above pair Euro is bias currency and Pakistani rupee is counter currency. if you have counter currency(Pakistani rupee) in your pocket and you want purchase bias currency (Euro) then money changer give you buy price 126.587 for single units. if you have bias currency (Euro) in you pocket and you want purchase counter currency (Pakistani rupee) then money changer give you sell price 125.587 for single units.

In case of buy euro from open market against Pakistani rupee

Single euro buying price                               = 126.587

You want purchase                                        = 10,000 euro

Total cost of 10,000 euro in  pak rupee     = 10,000 multiply 126.587 
                                                                          = 1,265,870

EUR/PAKrupee is not available in international market for trading we consider an other pair

                 Pair                                   Exchange Rate
                                                        Buy price / sell price
 
             EUR/USD                        1.4000     / 1.4397

In case of buy euro from open market against us dollar

Single euro buying price                              = 1.4000

You want purchase                                      = 10,000 euro

Total cost of 10,000 euro in  us dollar      = 10,000 multiply 1.4000 
                                                                        = $14,000
                                          (10,000 euro = 14,000 us dollar)  
You need $14000 for 10k lot( 10,000 euro) from open market.10k lot price is very high and thousands of small investors haven’t purchasing power even a single lot.This is reason the concept of leverage was introduced in the online forex trading.

In case of buy euro from online forex broker against us dollar if your broker give you leverage 100:1
Single euro buying price                       = 1.4000
You want purchase                               = 10,000 euro(10k lot)
Margin require according to 100:1    = $14,000/100=$140 

                                                               ($140 is 1% of $14000)

Forex Brokers allows trader to buy a currency lot without having total cost of lot. Due to the leverage forex trader have the ability to buy a large lot of money using very small amount and borrowing the rest amount from the broker.For Example if your leverage ratio is 100:1 then you can buy 10k lot of euro if you have $140 in your trading account. This small amount is called margin “good faith deposit” used to buy a currency lot from the broker.

when you open a trading account for online forex trading and deposit fund into your trading account this deposit is called margin deposit because your trading account is margin account. In margin account you can purchase currencies lot with only 1% or 2% of total cost of a lot for example if 10,000 euro is equal to 14000 us dollar you can buy 10,000 euro if you have only 1% of $14000 ($140) in your margin account.