Leverage and Margin in Stock Indices Trade

Main reason why online trading is popular is due to and because of leverage. Unlike traditional markets where a stock index trader uses only their trading capital to trade with, in online market traders can borrow extra money from their broker & use this extra money together with their own money so that to have more capital to trade with.

For illustration if a trader has $10,000 dollars in capital in the online market a trader can also borrow extra money when opening trade positions and open trade transaction of larger value than his $10,000 capital using leverage.

One can use leverage of 100:1 which is the default leverage in the online market. For leverage 100:1 what this means is that a trader can borrow $100 for every $1 dollar that they have in their account. Hence to calculate the overall total amount that a indices trader will borrow using leverage 100:1 then a stock indices trader will multiply their invested capital by 100 times, therefore if a trader invests $10,000 multiplied by 100 times, then the overall total amount which a stock index trader can now trade with is a total of $1,000,000 dollars. This is what makes the online trading market popular - Leverage.

Now that a trader will be trading on borrowed capital and as with every borrowed capital there is always a security that one must put down before accessing borrowed capital, what's the security/collateral for this leveraged amount of borrowed capital?

The security for this leveraged amount is the capital that you open an account with - in this case $10,000. This $10,000 is known as margin - margin is the security for the leverage that you'll be using. Therefore, in order and so as to continue accessing the leverage or borrowed capital you must make sure that you do not lose your capital so as to maintain this leveraged amount.

This is why as a trader you must do everything when it comes to learning about indices trading so that you can continue making profit on the market & that way your account balance continues increasing & that way you continue having access to the leveraged amount.

How Do You Properly Trade with Leverage and Margin?

As a trader you need to know that just because you have been given 100:1 leverage you don't have to use all of it. If you want to trade in this market for long a long time you need to keep your used leverage to below 10:1. That way you do not blow your account in just a few trades, if you want to follow even better money management you can even reduce your used leverage to a maximum of 5:1 - especially if your capital is $20,000 or $50,000 or $100,000. The more capital you have the less leverage you need to use so as to better manage your capital so that as you trade longer.

The Difference between Maximum Leverage and Used Leverage

When your broker gives and provides you leverage 100:1 this is known as maximum leverage, because it's the maximum set leverage for your account, but you don't have to use all of the leverage you only need to use about 10:1 or 5:1 leverage, this 10:1 or 5:1 leverage that you will be using is known as Used Leverage.

Money Management & the Best Leverage to Use

It is best to keep your leverage use below 10:1 leverage so as to better manage your money. It is best to keep your leverage low & this way you'll have enough Free Margin as compared and analyzed your used margin.

As long as you keep your leverage below 10:1 you'll have enough free margin and you'll be able to follow good money management rules.

If you use a lot of leverage you'll be over-leveraging & you'll not be following the best money management rules & you'll be taking greater risk with your invested capital.

To keep your risk to a minimum don't over leverage and always keep your used leverage below 10:1 or even below 5:1.

Example illustration of Leverage and Margin

For leverage and margin let us show you an example of this leverage and margin and where these 2 can be found in the software.

Stock Index Margin Calculator - What is The Best Leverage for Indices What is Best Leverage in Stock Indices Trade?

Leverage and Margin Trading

On the above account the account balance is shown & displayed - $10,905

Profit is $159 dollars

The equity is $11,065

The Margin is $970 - This is the margin used for the trades that are currently open

Free Margin is $10,094

The margin used is $970 dollars which's about 8% of the equity, equity is $11,000 dollars - This means the leverage used is 8:1.

The free margin is $10,094 which's about 10 times the used margin, free margin that is not being used is a lot meaning for this account the good money management rules are being followed and the correct leverage, that is below 10:1 is being used.

As a trader you should am to keep all your trades close to these levels so that you are in a position to better manage your account & ensure you're not using too much leverage - over leveraging.

This way you can make good profit in your account while at the same time not risking too much of your capital.

How Leverage is Used in Stock Index Transactions?

If you take an example of three Indices in the online market that are shown below:

1. Australia ASX200 - AUS 200Cash

Margin per One Lot - AUD 70

The margin or required capital by a trader to open AUS 200Cash index is AUD 70, this is after using leverage, if there was no leverage a indices trader would be required to put up AUD 7000 as the trading capital.

2. Italy FTSEMIB40 - IT 40Cash

Margin per One Lot - € 250

The margin or required capital by a trader to open IT 40Cash index is € 250, this is after using leverage, if there was no leverage a stock index trader would be required to put up the € 25,000 as the capital.

3. Spain IBEX35 - SPAIN 35Cash

Margin per One Lot - € 140

The margin or required capital by a trader to open SPAIN 35Cash index is € 140, this is after using leverage, if there was no leverage a indices trader would be required to put € 14,000 as the trading capital.

From the above example you can see that leverage makes the online market available to most retail traders by reducing/decreasing the initial capital required by over 100 times using leverage ratio 100:1, this is the reason why stock indices trading is becoming popular.

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