The only thing which is common in the word margin for stocks and margin for futures and the forex is the spelling of the two. Other than that the two are completely different things with antagonistic meanings.
Margin for stocks is like a down payment for ownership of the underlying asset, but margin for futures is not that. Future and forex margin represents a promise to pay. The primary users of futures were the users who actually bought and sold the futures, since futures began with tangible assets.
The exchanges were very well aware of this fact and came out with a very good solution to it. Since buyers and sellers have already heavily invested in their tangible assets and the futures are positioned and designed to be a hedge in which one side is minting money while the other side is losing cash. The exchange agency asks the hedger to put a small amount as collateral security. The thought behind it is that the profit minting side which is when liquidated can cover up all the losses easily.
With the introduction of speculator, this whole equation of using concept of margin as earnest money against true cash positions was put to test, in order to check the validity. Those who were of stable financial condition were given money margin but at higher rates than others i.e. those who have less of profitable sides and more of loss sides. Forex margins hold their originality from these principals only.
As a speculator, futures as well as forex margin can be a very tempting affair when looked from far, but since the margin is only a fraction of the total value, there can be grand fluctuations in profits and losses, and in case of futures you can actually lose a lot of money, even more than what you must have invested in the beginning.
Don’t Short the Market!
The shorting of market can be defined as:
Selling a security which does not belong to the seller or any kind of sale that is completed only when the security borrowed by seller is delivered. In case of short selling the idea in the mind of sellers is to buy the securities at lower price and selling them at higher price.
The investors who are new to the business should not try this out. This is an advanced form of selling and thus is a very risky thing to follow.
Why It Doesn’t Work for Stocks
Shorting the securities is a difficult endeavor both mechanically and philosophically! Mechanically buying stocks is easier than shorting it. There are various rules and regulations which one has to follow while shorting the stocks. Rules like one uptick rule and the very fact that you have to borrow those stocks for shorting and then there would be no stock available to borrow against the shorted stock. There are various problems which one will have to face.
So practically how should you short into an investment vehicle if the vehicle is not designed for shorting and that also boasts a huge count of investors who put their hopes, dreams and objectives into seeing it go up the scale. You cannot for certain! That is why stock market has created various exchanges in order to solve these problems. Investors with good knowledge and sense are turning more and more to the futures and forex market for earning profits.
Anyone who is indulged into futures and forex must learn to use short side as easily as the long side. This would keep the investor in check with the reality and would provide him or her with abundant opportunities to initiate trade. So don’t forget to make good use of shorts as it online loans with bad credit can help you earn big profits, not staying abreast with this would cut the opportunities into half which is not a very good situation to be into.