Margin
Trading currencies on margin lets you increase your buying power. Here's a simplified example: If you have $2,000 cash in a margin account that allows 100:1 leverage, you could purchase up to $200,000 worth of currency-because you only have to post 1% of the purchase price as collateral. Another way of saying this is that you have $200,000 in buying power. With more buying power, you can increase your total return on investment with less cash outlay. To be sure, trading on margin magnifies your profits AND your losses. Example: With a US$5,000 balance in your margin account, you decide that the Euro (EUR) will rise against the US Dollar (USD). To execute this strategy, you must buy Euros (simultaneously sell Dollars), and then wait for the exchange rate to rise. The current bid/ask price for EUR/USD is 1.3000/1.3004 (meaning you can buy 1€ for 1.3004 USD or sell $1 US for 1.3000 EUR) Your available leverage is 100:1 or 1%. You execute the trade, buying a one lot: buying 100,000 EUR and selling 130,040 USD.