Difference Between Maximum Stocks Leverage Set by the Broker & Used Stocks Leverage
If the set stock leverage ratio is 100 : 1, it means that you can borrow upto 100 dollars for every dollar that you have in your stocks account but you do not have to borrow all the 100 dollars for every dollar you have, but you can decide to borrow 50:1 or 20:1. In this case even though the leverage option set 100:1 your used stocks leverage will be the 50:1 or 20:1 that you have borrowed to make a trade.
Example:
You have 1000 dollars (Equity)
Set 100:1
Stocks Leverage Used = Amount used /Equity
If you buy trading lots that are equal to 100,000 dollars you'll have used
= 100,000/1000
= 100:1
If you buy trading lots that are equivalent to 50,000 dollars you'll have used
= 50,000/1000
= 50:1
If you buy trading lots that are equivalent to 20,000 dollars you'll have used
= 20,000/1000
= 20:1
If you buy trading lots that are equivalent to 10,000 dollars you'll have used
= 10,000/1000
= 10:1
In these 3 cases you can see that even though the set is 100:1
The used is 100:1, 50:1, 20:1 and 10:1 depending on the size of lots traded.
So Why not Just Select 10:1 option as the Maximum Stocks Leverage? Because to keep within proper risk management rules it is even recommended that investors use less than this?
This question might seem straight forward but it's not, because when you trade you use borrowed money known A.K.A. Stocks Leverage. When you borrow capital from anyone or a bank you must maintain a security or collateral to acquire a loan, even if the security is based on monthly deduction from your salary, the same thing with Stocks.
In stocks the security is known as margin. This is capital you deposit with your broker.
This is calculated in realtime as you trade. To keep your borrowed money you must maintain what is known as required capital (your deposit).
Now if Your Stocks Leverage is 100:1
When trading if you have $1,000 and use option 100:1 and buy 1 standard lot for $100,000 your margin on this transaction is $1000 dollars in your account, this is money that you'll lose if your open trade goes against you the other $99,000 that is borrowed, they will close the open stocks trades automatically once your $1,000 has been taken by the stocks market.
But this is if your stocks broker has set 0% Stock Margin Requirement before closing your stock trades automatically.
For 20% requirement before closing your stock trades automatically, then your trades will be closed once your balance gets to $200
For 50% requirement of this level before closing your stock trades automatically, then your trades will be closed once your balance gets to $500
If they set 100% requirement of this level before closing out your open trades automatically, then your trade will be closed once your balance gets to $1,000: Meaning the trade will close-out as soon as you execute it because even if you pay 1 pip spread your account balance will go to $990 & the needed percent is 100% i.e. 1,000 dollars, therefore your orders will immediately get closed.
Most brokers don't set 100% requirement, but there are those that set 100% are not suitable for you at all, select those set 50% or 20% margin requirements, in fact, those brokers that set it at 20% are some of the best because the likely hood they closeout your trade is reduced as displayed in the example above.
To know about this level which is calculated by your platform automatically - The MT4 Stocks Platform will display this as "Stock Margin Requirement", This will be displayed as a percent the higher the percent the less likely your trades are to get closed.
For Example if
Using 100:1
If stock leverage is 100:1 and you transact 1 Mini Lot, equals to $10,000
$10,000 dollars(mini lot) divide by 100:1, your used trading capital is $100
Calculation:
= Capital Used * Percent(100)
= $1,000/$100 * Percent(100)
Stock Margin Requirement = 1,000 %
Investor has 980% above the required amount
Using 10:1
If stocks leverage is 10:1 and you transact 1 Mini Lot, equals to $10,000
$10,000 dollars(mini lot) divide by 10:1, your used capital is $1000
Calculation:
= Capital Used * Percent(100)
= $1,000/$1000 * Percentage(100)
Stock Margin Requirement = 100 %
Investor has 80% above the required amount
Because when a trader has a higher stocks leverage means that they have more percent above what's required(A.K.A. More "Free Stock Margin") their open stocks transactions are less likely to get closed. This is reason why traders will choose the option 100:1 for their trading account but according to their risk management rules, they will not trade above 5:1.
These Levels are Shown on The Software Screen-Shot Below as an Examples:
MetaTrader 4 Stock Platform
