Margin & Leverage

What is Leverage in Trading Terms?

Leverage is a kind of loan or borrowed money usually provided by the broker. Traders using leverage means that a trader can take a lager position without actually paying the whole upfront amount, but the profit will be calculated on the whole value of trade. It helps the trader to get a larger exposer in the market and magnify their potential to make bigger profits.

Leverage is one of the biggest advantages a trader gets while trading CFDs. It is a very powerful tool, and professional trades use leverage to take advantage of small price movement to produce greater returns on their investment.

Leverage is expressed in the form of ratios like 50:1, 100:1, 400:1 that means if your broker allows you 400:1 leverage ratio, you need only 1000 dollar in your trading account to take positions for 400,000 dollars.

What is Margin in Trading Term?

There is a very small difference between leverage and margin, but both are a type of debt provided by the broker. Margin is defined as the minimum balance required by the trader in his trading account to open a leveraged position.

Generally, there are two types of margin in trading terms: initial margin and maintenances margin, where the initial margin is the amount needed by the trader to use leveraged products. The initial margin is also known as a minimum deposit or deposit While maintenances margin comes in play when you have an open leveraged position. If your trade starts to incur losses, then maintenances margin is the minimum amount needed to keep that position open.

One of the best advantages of margin is that it enables traders and investors to diversify their portfolio by buying on margin that helps to spread their capital even further. It also helps them to get higher market exposer with limited capital.

So, what is The Difference Between Margin and Leverage?

  • Leverage is a kind of debt which trade takes to open a larger position
  • once you have taken a leveraged position, then there is no extra charge for leverage till the position is closed.
  • Margin is like a collateral deposit held by the broker to hold an open position
  • Trades have to maintain the initial margin as well as the maintenance margin to keep the position open in case the trade incurs losses.

Benefits of using the leverage

Leverage is a very powerful tool if used cautiously. It has many benefits such as

    • Magnified profits -it helps trades to magnify their potential to make a profit on smaller price movements.
    • Greater exposer -It allows traders to take a larger position with very limited capital.
    • Greater spread of capital- using leverage traders can spread their capital to achieve a more diversified portfolio
    • Shorting the market- you can use leveraged products to speculate on price movement, and trading via CFDs enables you to trade market from both the side, long as well as the short side.

Leverage Risk and Margin Monitor

Using leverage can help you to magnify your profits from a relatively small investment at the same time you are exposed to higher risk and can incur more significant losses if you fail to apply proper risk management.

Trading with leverage gives you various benefits, but it has several drop backs. Also, when you trade using leverage, you give up the shareholder privileges because you don’t own the underlying asset.

At CSFX, you can control your risk by monitoring your margin. Used margin refers to the margin you have used to open a position, and free margin refers to the amount left in your trading account.

Capitalstreet FX also provides margin call alerts. Suppose you open a position, and it moves against you, then capital street may ask you to add some additional money if you want to keep the position open. This is known as Margin Call, and you can either you can add funds, or you can choose to exit your position.

What is Stop-loss Level in Trading?

Stop-loss is a risk managing tool which helps traders to manage their risk. It helps the trader to automate their trade, that means a trader can set a level at which the open position will get automatically closed. It helps the trader to minimize their risk if the trade suddenly goes against them.