“Leverage and Margin

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 16.04.2020>

Dear reader,

Hi! If you are interested in online trading you should read the below that provides important information about  what it means to trade with leverage and how this affects margin requirements.

 

Online Trading Platforms allow trading in lots. The contract size refers to 1 lot. So for example, 1 lot EURUSD will be 100,000 units of EUR > these 100,000 is the contract size.

Lot: A unit of measurement regarding the position size, like a share in Equities, or a contract in Futures.

Lot can be referred to as the number of currency units (size) you will buy or sell.

 

Leverage

Using leverage allows you to increase potential profits but also losses. With a small amount of capital in your account , you can trade much bigger volumes than you would normally could.

Traders can trade on a highly leverage basis most commonly at 50:1 (it means controlling positions 50 times higher than their own funds).

Example with Original Funds = 10,000:

Trader wants to Buy 100,000 EURUSD (100K EUR). Leverage: 1:50

So Margin Required = 100K / 50 = 2,000 EUR only for a long position of 100,000 EUR.

> A price change leads to larger profits/losses since amount bought is higher.

 

Margin Requirement

Margin Requirement is the deposit required to open or maintain a position. Brokers typically will allow a 50:1 leverage. This means that the margin/funds required to open a position will be lower 50 times, the margin that would normally be required. Margin is then calculated by taking the contract size divided by 50.

Example:1/50 Leverage => Margin Requirement 0.02 or 2%.

So 2% x 100,000 (1 lot EURUSD) = 2,000 margin required for opening a position (in EUR/base currency)

 

What is the difference between the Forex/CFD Margin vs. Securities Margin?

In the securities world, margin is the money you borrow as a partial down payment, usually up to 50% of the purchase price, to buy and own a stock, bond or ETF “buying on margin” a loan from the brokerage firm. In Forex (CFD trading – It is NOT a down payment, and you do NOT own the underlying currency pair.

Margin can be looked at as a good faith deposit or collateral that’s used to ensure each party (buyer and seller) can meet their obligations of the agreement.


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
Risk Warning: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. It is possible to lose all the initial capital invested.

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