What Are Credits?
Think of credits as a bonus from your broker that increases your trading ability without dipping into your own funds. They’re like a line of credit that you can use to trade more shares or explore more options than you could with just your money.
They function as an additional resource, expanding the margin you have available for initiating trades. This additional margin provides you with a wider safety net and increased potential for leveraging your trades.
Why Are Credits Offered?
Typically, brokers issue credits primarily for promotional objectives to help kickstart your trading journey. While they boost your trading capacity, they’re not withdrawable cash. They’re designed to enhance your trading experience, giving you a taste of what it’s like to handle bigger trades. Their value lies in their ability to increase your trading power.
Equity: Measuring Your Trading Value
Think of your equity as the sum of your trading account’s value. It consists of your actual balance plus any credits from your broker and the profits or losses from your trades.
Equity = Balance + Credits + PnL
These credits are a part of your equity thus increasing the total value of your account and boosting your investment potential.
The Value of the Credits Balance
Credits are a constant unlike your real funds, which fluctuate with market ups and downs. Instead, they are not used up in the trading process; rather, they persist as a fixed addition to your balance, preserving their full value regardless of trading outcomes.
Negative Balance Protection
Credits give you a buffer. If your trades go south and your balance starts to shrink, they allow your account to go into the negative without immediate repercussions up to the credited amount.
It’s a built-in safety feature to keep you trading even when the market is tough. It effectively lowers the risk of liquidation during volatile market conditions, offering a valuable safety net for traders.