Leverage and margin

Traders are commonly confronted with the option to use leverage and margin with their trades. These terms are intertwined because you use your margin to create leverage — one leads to the other. Margin means that your broker is lending you money to open positions that are several times larger than what would otherwise be possible with your available trading capital. The collateral for the loan is the cash in your margin account, and when trading on a larger timeframe, you can expect to pay interest on this loan. Short-term traders are often in positions very briefly, and therefore are less concerned with margin interest.

Trading With Leverage

Those with a margin trading account — which must be obtained via special application — can create leverage for their trades. Leverage multiplies your buying power by allowing you to pay less to open a position, making it possible to command much larger positions with a comparatively small amount of capital. With 2:1 leverage, for example, you’re able to buy CFDs at half price, meaning that you can also open a position that is valued at double the amount of funds deposited in your account. It works this way no matter how much leverage you’re using.

If you’re trading with 30:1 leverage and have $1,000 in your trading account, then you’d be able to open a position worth $30,000. Note that you do not need to open a position with all your trading capital. If a stock is trading at $100 for one share, using 30:1 leverage means that you can buy one share for just $0.30. With $1,000 and 30:1 leverage, you’d be able to open a position of 300 shares in the company. Always be aware that leverage has the potential to magnify your profits or losses.

The Margin Call

While margin trading can magnify potential returns, trading with leverage also comes with increased risks. Brokers employ what’s known as a ‘margin call’ to alarm traders that their account has depreciated to a value calculated by Investous’s particular formula. Trades with leverage that move in the wrong direction can multiply quickly and drain your available trading capital much more rapidly.

If leveraged trading positions deplete available trading capital past a certain threshold, the platform will alert an investor about their account balance. At this point, you’ll be margin called and prompted to deposit more money to keep the position open. If you don’t satisfy the margin call with a deposit, the position will be automatically closed to prevent the account from sinking into a negative balance.

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Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80.41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. Before deciding to trade, you should carefully consider your investment objectives, level of experience and risk tolerance. You should not deposit more than you are prepared to lose. Please ensure you fully understand the risk associated with the product envisaged and seek independent advice, if necessary Please read our Risk Disclosure document.

 

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F1Markets Limited does not issue advice, recommendations or opinions in relation to acquiring, holding or disposing of any financial product. Past performance does not constitute a reliable indicator of future results. Future forecasts do not constitute a reliable indicator of future performance.

 

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