Great question @TradingPanda
To answer properly, it’s first important to explain how margin trading in forex (and futures) differs from margin trading in stocks.
With stocks, when you trade on margin, you put up a fraction of the value for the shares you purchase, and your stock broker lends you the remaining amount of money needed to buy the stock. For example, if you wanted to buy $100,000 worth of AAPL on margin, you could put up $50,000, and your stock broker would lend you the remaining $50,000. They would charge you interest for this loan.
With forex (and futures), when you trade on margin, you put up a fraction of the value for the currency position you take, but your forex broker (or futures commission merchant) does not lend you any money. That’s because the margin you put up in forex (and futures) acts as a good faith deposit. For example, in the US, the margin requirement to trade EUR/USD is 2%. Assuming an exchange rate of 1.1500 for EUR/USD, that’s $2300 required margin to open a standard lot (100K) position in EUR/USD, since 100,000 euros would be equivalent to 115,000 US dollars at that exchange rate.
While forex brokers don’t lend you money to trade on margin, you can earn or pay rollover interest on trading positions you hold from one day to the next. In the 24-hour currency market, 5pm New York Time marks the cutoff between the end of one trading day and the start of the next. That means, if you hold an open position through the 5pm cutoff, it will be rolled over to the next trading day, and you will earn or pay rollover interest accordingly.
The screenshot above was taken from the Current Rates window of our FOREXTrader platform this Tuesday. It shows you could have earned 52 cents in rollover interest for holding a mini lot (10K) short position in EUR/USD that day at 5pm or about $5.20 for a standard lot (100K). Notice there’s a spread between the amount of rollover interest you would earn for being short EUR/USD and the amount you would pay for being long. Forex brokers make money from this rollover interest spread, and you will find FOREX.com spreads on rollover interest are competitive.
You may find this earlier discussion on rollover interesting (pun intended) Can someone explain to me what rollover interest is?