What do I mean charging you interest? swap rates vary from broker to broker, bank to bank http://www.citifxpro.com/rollovers
they give you 50k when you only have a 1k account because.. they want you to trade larger amounts then what you could with just 1k If you trade 500 bucks and the spread is 2 points they make 2 points on 500 bucks.... If you trade 25k bucks and the spread is 2 points they make 2 points on 25k bucks or somewhere around 500-600% more profit off you then they would if you traded smart. You allow them to do this because you think hey if I traded 500 bucks and made 20 pips i made a dollar i could trade 25k or 1/2 of the 50k and make 10 bucks for the same work.... but what fail to tell new traders is that ... that extra 49k they give u .. cant be lost.. they will liquidate your posistions at 1k losses to save their 49k... and basically said glad you stepped into the casino... i see you have no money.. let me show you to the exit doors.
http://www.interactivebrokers.com/en/general/education/comparebrokers.php Banks extend credit lines to b/d'ers who extend to clients in the form of leverage. The interest charged + commissions + spread + order flow makes it profitable for a b/d'er to offer it.
Thanks Nukethewhales, Pretty much just confirmed exactly what I wrote on the previous page.... Just a simple confirmation was all that I was looking for. Sorry If I came across in any other particular way other than asking for a little rope from someone.... JuniorCTA im not entirely sure why you paraphrased what I wrote to make it appear like I didnt know what swaps were or how interest rates work as I never said I didnt.... thanks for the link either way.... You`ve only made it sound like they can ONLY deduct interest from me and cannot me debited to me.... this isnt exactly the best explanation to one of the factors for why brokers provide leverage... Anyway, again thanks to all those who were constructive and sorry to those who wasted their time in forced writing.
Yeah I only know a little bit about this, is there any links you could recommend I read to fully understand this? Or either explain why it is banks "extend their credit lines".... (not entirely sure how this works and whether or not this is a form of loan or even leverage from banks to the broker?)
Stop thinking about things that don't matter and just go trade! Sheesh... Understanding the infrastructure that supports trading is NOT essential to trading and totally a waste of time to think about.
There's a short blurb on wiki. A google search for "margin interest" would do. Banks loan money to broker-dealers (used for customer leverage), for the same reason they extend personal lines of credit, underwrite mortgages, or loan business money = to collect interest. It's no different than any other form of loan a bank offers. The reason it's profitable is because retail traders need more credit to trade than they have on account. Like NuketheWhales said, it's profitable for a b/d'er to offer it, because then they can make the spread on 1000 shares instead of 250 shares = more money for them. Extending credit to a broker to make leverage available to customers ensures a large line of credit or whatever is held by the broker/dealer at any given time, which accumulates interest in the banks favor. The reason why it's a low risk loan is due to hypothocation. In the case of a mortgage, a bank loans money to a home buyer, on the condition the bank "hypothetically" owns the home and can liquidate the property if payments go into arrears or can't be made. Similarly, with financial securities or commodities, those securities or instruments purchased by the customer are used as collateral against the leverage (read: loan) that was used to purchase those securities. It gets confusing using a forex example, a bank is loaning money to buy money.... But in the case of equity securities, it's easy. Say you want to buy 10,000 shares of MSFT on leverage. You broker loans you 360,000$ to buy 10K shares of MSFT at 36$ per share. The collateral on the 360,000$ your broker loaned you, is the shares you bought. If your loss on the position meets or exceeds your account balance, the broker liquidates those shares on the open market to recover it's loan to you (360,000$), your account is zero, the broker collects the spread on the transaction + margin interest, and the bank charges margin interest/line of credit to the broker. This is all spelled out in your broker agreement nobody reads (I didn't). The banks and broker/dealers make money. Retailer traders are only afforded *the chance* to make money. Retailers participate for the same reason people buy lottery tickets or go to the casino = chance to profit. But don't get bogged down in the details of this. Like RunningBear said, it's got nothing to do with actually learning how to trade profitability. There's a good book by Larry Harris called Market Microstructure for Practioners. Again, unless you plan on working for a brokerage to collect fees, study the charts.
Lol. Superb advice: "dont worry about the force of which you bang that nail into the wall with your hammer or what's behind it, just do it" (gas pipe, electrics) If its any consolation I do trade (im neither confirming if im consistent or a loser purely on the fact that I dont have anything to prove to you nor is it in my interest to try and convince you over a forum of high egos) and have been for over 3 years. Im a little embarrassed that at this stage I never actually educated myself to understand the financial markets in a bigger sense... If you`re round long enough maybe you`ll reconsider....
Thanks for this! What I find a little confusing though is that if (in terms of retail forex brokers) they are STP+ECN then I thought its the liquidity providers that provide the leverage not the brokerage.... they`re only there to provide clients to liquidity providers and make their commission from the spread....