Understanding Leverage and Margin

Leverage and margin are two sides of the same coin in financial trading. They allow retail traders with modest account balances to control significantly larger positions in the market.

What is Margin?

Margin is the good-faith deposit or collateral required by your broker to open and maintain a trading position. It is not a cost or transaction fee; rather, it is a portion of your account balance that is locked while your trade is open.

For example, if a broker requires a 1% margin, it means you must have $1,000 in account collateral to open a position worth $100,000.

What is Leverage?

Leverage is the ratio of the total position value to the required margin deposit. It represents your amplified buying power.

• A margin requirement of **1%** corresponds to a leverage ratio of **100:1**.
• A margin requirement of **0.2%** corresponds to a leverage ratio of **500:1**.

With 500:1 leverage, you can control a $100,000 position (1 Standard Lot) with just $200 of margin.

The Double-Edged Sword While leverage increases your potential profit, it equally increases your loss velocity. A small adverse market movement can trigger a **Margin Call**, where the broker automatically closes your losing trades to prevent your account balance from going negative.