Stocks Leverage & Margin Explained

The definition of Stocks Trading Leverage is having the ability to control a large amount of money using very little of your own money & borrowing the rest - this is what makes the stocks market to attract many investors.

We shall explain stocks leverage first & then explain stocks trading margin in this learn how to calculate stocks leverage and margin tutorial.

Example:

We shall us this example to explain what stocks leverage is? If your broker gives you stocks leverage of 100:1 (this is best option to choose as the maximum stocks leverage for any stocks trading account)

This means you borrow 100 dollars for every dollar you've in your stock trading account.

To put in another way your stocks broker gives you 100 dollars for every 1 dollar in your trading account. This is what's known as leverage.

This means if you open an account with $1,000 & your stock leverage is 100:1, then you will get $100 for every $1 you that you've, the total amount which you will control is:

If for 1 dollar the broker gives you 100

Then if you have 1,000 you will get a total of:

$1,000 * 100 = 100,000 dollars

Now you control 100,000 dollars of Investment

Most new stocks traders ask what stocks leverage is best stocks leverage for 1,000 dollars, or 2,000 dollars, or 5,000 dollars stocks account? - The best stocks leverage option to choose when opening a live Stocks Trading account is always 100:1 & not 400:1.

What is Stock Trading Margin?

Stocks Margin is the amount of money required by your broker so as to allow you to continue trading with borrowed amount.

In other words the question what's margin in Stocks? can be explained as the money required to cover open stock trades and is expressed in percent. For 100:1, the amount you'll control is 100,000 dollars as described in the above example.

Now can i compare someone investing $1,000 with another one investing $100,000? Obviously Not. This is how it works, it takes you from that guy investing $1,000 to that one investing $100,000. Where does this extra money originate from? You borrow from your stocks broker in what's simply referred to as Leverage. This money that you borrow, you borrow it against the $1,000 dollar of your own money which you deposit with your stock broker. If you were to explain what this stocks trading leverage means - then it is ability to control a large amount of money using very little of your own money & borrowing the rest. Otherwise, if you were trade Stocks Trading without this leverage it would not be as profitable as it is, in fact you can still select not to use leverage, using the 1:1 leverage option but you would not make money and it would take too long to make any profit.

Example of how to calculate stock leverage & margin:

Stocks Trading Margin required in this case is 1,000 dollars (your money) if it is expressed as a percentage of 100,000 dollars in your stocks account which you control it is:

If stocks leverage = 100:1

1,000 / 100,000 * 100= 1%

Margin required = 1%

(1/100 *100= 1%)

"Trade Forex Trading - Please simplify because I am Beginner"

(Simplify - your capital is $1,000 after stocks leverage you control $100,000 - $1,000 is what percentage of $100,000 - it is 1 %) that is your margin requirement for your stock trading account.

The stocks trading margin example illustrated and explained below, the set stock leverage is 100:1, the margin which is 1% is $2683.07, therefore the total amount controlled by the trader is: $268,307 - this is because with this leverage the trader has used little of his money & borrowed the rest, with this set at 100:1, the trader is using 1 % of their capital, this 1% is equal to $2683.07, if 1% is equal to $2683.07 then 100% is $268,307

MT4 Transactions Window Panel - Stock Leverage & Margin Explained

• If = 50:1 Leverage

Then margin requirement = 1/50 *100= 2 %

If you have $1,000,

1,000* 50 = $50,000.

1,000 / 50,000 * 100= 2%

(Simplify - your capital is $1,000 after stocks leverage you now control $50,000 - $1,000 is what percent of $50,000 - it is 2%) that is your stocks trading margin requirement

• If = 20:1 Leverage

Then the requirement = 1/20 *100= 5%

If you have $1,000,

1,000* 20 = $20,000.

1,000 / 20,000 * 100= 5%

(Simplify - your trading capital is $1,000 after stocks leverage you now control $20,000 - $1,000 is what percent of $20,000 - it is 5%) that is your stocks trading margin requirement

• If = 10:1 Leverage

Then the requirement is = 1/10 *100= 10 %

If you have $1,000,

1,000* 10 = $10,000.

1,000 / 10,000 * 100= 10%

(Simplify - your trading capital is $1,000 after stocks leverage you now control $10,000 - $1,000 is what percent of $10,000 - it is 10%) that is your stocks trading margin requirement

What is The Difference Between Maximum Stock Leverage & Used Leverage?

However, you should note that there's a difference between maximum stocks trading leverage ( stocks trading leverage given by your stocks broker which is the highest stocks leverage you can trade with if you select to) & used stocks trading leverage ( stocks trading leverage depending on the lots you've opened/open trades). One is the broker's (Maximum Stock Leverage) & the other is trader's (Used Leverage). To explain this stocks leverage concept we shall use the stocks example above:

If your stocks broker has given you 100:1 Maximum Stock Leverage, but you only open a trade of 10,000 dollars then Used Stocks Trading Leverage is:

10,000 dollars: 1,000 dollars (your money)

10:1

Your have used 10:1 Leverage, but your maximum is still 100:1 Leverage. This means that even if you're given 100:1 Maximum Stocks Leverage or 400:1 Maximum Stock Leverage, you do not have to use all of it. It is best to keep your used stocks leverage to a maximum of 10:1 but you will still choose 100:1 maximum stocks leverage option for your trading account. The extra stocks leverage will give you what we call Free Stock Margin, As long as you have some Free margin on your stocks account then your trades will not get closed by your stocks broker because this margin requirement will remain above the required level.

When it comes to stocks trading one of your rules: money management guidelines on your trading plan should be to use stocks trading leverage below 5:1.

In the above image examples, the trader is using $2683.07, total controlled amount is $268,307, but account equity is $16,116.55, therefore used stock leverage is ($268,307 divide by 16,116.55) = 16.64 : 1

16.64 : 1 Used Leverage

Stocks Margin accounts allows traders to control a large amount of currency using little of their own while borrowing the rest

Obtaining this stocks account will enable you to borrow money from the broker to trade stocks trading lots with.

The amount of borrowing power your account gives you what is called "leverage", & is usually expressed as a ratio - a ratio of 100:1 trading leverage means you can control resources worth 100 times your deposit amount.

What this means in Stocks Trading terms is that with 1 % margin in your stocks account you can control a trade worth $100,000 with a $1,000 deposit.

However, Trading this stock account increases both potential for profits as well as losses. In Stocks Trading you can never lose more than you deposit, losses are limited to your deposits and usually brokers will close a transaction that extends beyond your deposit amount by executing what is known as a margin call. Traders must therefore try to keep their margin level above that required. By using money management guidelines and keeping your used leverage below 5:1.