Understanding Leverage and Margin

Leverage allows a trader to control a larger position than their own capital would otherwise permit, typically by borrowing funds from a broker. Margin refers to the amount of a trader's own capital required to open and maintain a leveraged position.

How Leverage Works

With leverage, a relatively small deposit can control a much larger position size. For example, with a hypothetical 10:1 leverage ratio, a deposit of $1,000 could control a $10,000 position. This means gains and losses are calculated on the full position size, not just the deposited amount.

• Leverage magnifies both potential gains and potential losses proportionally—it does not change the underlying probability of a trade working out, only the size of the outcome.
• A relatively small adverse price move can result in a loss that represents a large percentage of the margin deposited.
• Brokers may issue a margin call, requiring additional funds, if a leveraged position moves against the trader and account equity falls below a required maintenance level.
• If a margin call is not met, the broker may close the position automatically, sometimes at an unfavorable price.