There are two main types of foreign exchange transactions, one is real trading and the other is margin trading. What is the difference between real foreign exchange trading and margin trading, let’s take a look together below.
What does real foreign exchange trading mean?
One is the real bank transaction, which refers to the non-overdraftable freely convertible foreign exchange (or foreign currency) transaction conducted by individual customers in the bank through counter service personnel or other electronic financial services; the other is personal real transaction Foreign exchange trading, commonly known as “foreign exchange treasure”. Personal real foreign exchange trading is a kind of buying and selling business, whose main purpose is to earn exchange rate differences. At the same time, customers can also use this business to convert their foreign currencies into foreign currencies with more appreciation potential or higher interest rates to earn Exchange rate fluctuations or higher interest income. Real foreign exchange transactions can only buy up, not down, and the advantage is stable income.
Foreign exchange real trading
The characteristics of a firm offer are that the risks and returns are relatively small, and the transaction fee (spread) is slightly larger, generally 10-30 points. If the funds are too small, the benefits may be limited. Real foreign exchange has certain shortcomings, such as excessive trading spreads, high handling fees, only unilateral trading, and small capital gains that are too small.
What does foreign exchange margin trading mean?
Foreign exchange margin trading uses financial leverage. The leverage provided by foreign exchange brokers ranges from 20 times, 50 times, 100 times, 200 times, 500 times, and 1000 times. If leverage is not required, a margin of 10W USD is required to buy and sell one hand of foreign exchange transactions. However, the principle of leverage is used. Assuming a leverage of 200 times, it will cost $500 to trade 1 lot. Other funds are advanced by the broker. The utilization rate of own funds has been greatly improved, and the risks have also been multiplied. Margin trading is widely used. Futures trading, foreign exchange trading, gold trading, crude oil trading, stock margin financing and securities lending all use margin trading methods, playing pure digital games.
Foreign exchange margin trading
Margin trading can be regarded as one of the most attractive investment methods, and it is also an international trading method. Through leverage, the transaction volume can be enlarged by 100-200 times, and individuals can conduct transactions through the Internet and telephone.
Margin trading is when investors conduct foreign exchange transactions with financing provided by banks, market makers or brokers. The general financing ratio is more than 20 times, or even 200 times, that is, investors’ funds can be enlarged 20-200 times for trading. The greater the proportion of financing, the less funds customers need to pay.
In addition to capital enlargement, the other most attractive feature of foreign exchange margin investment is that it can be operated in both directions. You can buy profits when the currency rises (make a long position), and you can sell profits when the currency falls (make a short position). ), so as not to be restricted by the so-called unprofitable bear market.
The difference between real foreign exchange trading and margin trading
The difference between real foreign exchange trading and margin trading
- Different trading channels
Investors in real foreign exchange transactions must go through the bank. Investors can exchange foreign currencies in their foreign exchange accounts with reference to the foreign exchange quotes provided by the bank or through cash exchange. And foreign exchange margin trading is that investors directly invest themselves in the international foreign exchange market through some foreign exchange dealers for trading.
- The expected annualized rate of return is different
Compared with real foreign exchange transactions, foreign exchange margin trading can greatly save capital costs and increase capital contribution interest rates. Assuming that the margin share is 5% and the foreign currency amount of each contract is US$100,000, foreign exchange is traded in the form of a margin contract. The capital contribution is generally not higher than 5% of the margin contract amount, that is, US$5,000, and the profit or loss is based on The total amount of the entire margin contract is 100,000 USD.
Investors can trade several or dozens of contracts according to their own principal or margin. Based on the above assumptions, it is a comparison of the rate of return between margin foreign exchange transactions and real foreign exchange transactions. Real trading and margin trading are exactly the same in the amount of surplus and loss. The difference is the difference in the amount of funds invested by investors.
- Different spreads
The spread of real foreign exchange transactions of many banks is basically between 16-x40 points. Such a large spread greatly reduces the profitability of investors, so there are fewer opportunities for intraday transactions. The spread of foreign exchange margin trading is generally between 4-5 points, which greatly enhances the profitability of investors and greatly increases the timing of their intraday trading.
- Real traders can only profit in a single direction
For example, if the trader’s principal is in euros, then after the trader sells euros and buys other currencies, he can only make a profit when the euro falls; if the euro continues to rise, the trader will lose money. Either liquidate the position and stop the loss, or miss other trading opportunities in vain. The margin trading is relatively flexible.
When other currencies rise, traders can sell euros and buy other currencies (that is, short euros) to make a profit, and when other currencies fall, they can buy euros and sell other currencies (that is Do more euros), can also achieve the purpose of profit.
- Different specific operation methods
Real foreign exchange trading refers to the fact that traders earn profits through continuous foreign exchange conversions in the foreign exchange market; while in margin foreign exchange trading, although investors also earn profits from exchange rate fluctuations, investors actually do short-selling transactions , And the margin is only used as a risk-bearing capital, and the transaction is carried out in the case of several times of expansion.
Therefore, margin trading is actually a simple speculation. Taking 100 times the share of margin trading as an example, the trader can increase the funds in his hand by 100 times at most. At this time, as long as the fluctuation of the market reaches 1% (generally, the fluctuation of the exchange rate in a day is about 1%), the trader’s margin is either Double it, or lose it all.
It can be seen from this that margin foreign exchange trading is a high-risk, high-return foreign exchange trading method.
The leverage mode of foreign exchange margin trading can increase the amount of funds in the hands of investors hundreds of times, so the profits of investors in foreign exchange margin trading are also amplified simultaneously.