One of the most important concepts to understand when trading in online investment markets like the Forex market is what is contribution margin. How is the contribution margin defined? In simple terms, it is the difference between actual units traded and actual units earned. For instance, if the company sells 1 million widgets in a day and earns 500 widgets per widget, its contribution margin would be 500 widgets per unit.
A lower ratio would mean that a company can make more profits but it will have to invest more money. One way to look at it is to assume profit as the amount of money the company makes after all the variable costs are deducted. How is what is the contribution margin ratio determined? The contribution margins actually depend on what is called the Margin Multiplier which is essentially a term that represents how much profit a certain type of investment will earn depending on the amount of variable costs that are invested in it.
So what is contribution margin per unit then? This is a ratio that tells us the profit that the company will make on average per unit. The higher the number the better since it basically tells us how much profit the company is going to make on average. And as you probably know, the higher the number the greater potential there is for one to make money. It just so happens that the Forex market is very high risk as well.
So what is contribution margin ratio in the context of the Forex market? In the Forex market, a good and safe place to invest your money is at the bottom. That is because there you can enjoy the most risk free profits that a smart investor can enjoy. And when you invest your money at the bottom, you are actually given the opportunity to earn the greatest profits that you can enjoy. But there are a few things that you need to consider in order to hit the breakeven point.
The first thing that you need to do is identify the profit and loss indicator. This is what is called the bid/ask spread which is basically the cost of trading currency pairs on the Forex market. When looking at the bid/ask spread, it is imperative that you identify the breakeven point where you can determine if your investment has benefited from the market. Once this is determined, then you can determine the contribution margin that you will have to use.
One good thing about the Forex market is that you have a lot of currency pairs to choose from. This means that you can easily switch between them and also benefit from the different profit and loss indicators. It is not advisable though for you to go with a Forex broker just because he or she gives you a high contribution margin. Instead, you should check out the various variable costs that you may incur. These include the transaction costs and the variable costs which are imposed based on the size of your account.
You should also take note that even though brokers will give you a high bid/ask spread, this does not necessarily mean that you will have a lot of income statements to base your decisions on. This is because the bid/ask spread varies depending on the actual market situation. Another important thing that you need to consider when determining the contributions that you will have to make is the fixed cost to variable cost. This is basically the amount of money that you will be spending on transactions each month but you will get fixed income statements no matter what. So how do you know which ones will give you the better income statement?
Basically, the higher the fixed cost per unit that you will be paying, the lower the contribution margin ratio will be. If you are willing to pay the fixed cost per unit that you are required to pay, then you will be assured that you will not miss out on any profit because of the difference in the bid/ask spread. In this way, it will be easy for you to calculate the amount that you will have to invest in order to earn more profits from the Forex market. You may also want to compare the income statements that you will get once you have made your investment decision to the other companies that are making investments in the Forex market. By knowing what is the contribution margin ratio, you can also determine if your choice of investment is still viable especially if you want to maximize your potential profit.