What Is Stocks Trading Leverage for Stock Beginners?
The definition of Stocks Leverage is having the ability to control a big amount of money using very little of your own money and borrowing the rest - this is what makes the stock trading market to attract many traders.
We shall explain stocks leverage first and then explain stocks trading margin in this learn how to calculate stocks leverage and margin stocks tutorial.
Stocks Trading Example:
We shall us this stocks example to explain what stocks leverage is? If your stocks broker gives you stocks leverage ratio of 100:1 (this is the best option to select as the maximum stocks leverage for any stocks 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 stocks account. This is what is known as stock trading leverage.
This means if you open a stocks account with $1,000 & your stocks leverage is 100:1, then you'll get $100 for every $1 you that you have, the total amount which you will control is:
If for 1 dollar the broker gives you 100
Then if you have 1,000 in your stocks account you will get a total of:
$1,000 * 100 = 100,000 dollars
Now you control 100,000 dollars of Capital after stocks trading leverage
Most new stocks traders ask what stocks leverage is best for 2,000 dollars, or 5,000 dollars, or 10,000 dollars stocks account? - The best stocks leverage ratio to select when opening a live Stocks Trading account is always 100:1 & not 500:1.
What is Stocks Trading Margin?
Stocks Trading Margin is the amount of money required by your stocks broker so as to allow you to continue stocks with the borrowed amount - leveraged amount.
In other words the question what is margin in Stocks? can be explained as the money required by your stocks broker to cover open stock trades and is expressed as a percentage. For 100:1 leverage, the amount you will control is 100,000 dollars as explained in the stock trading example above.
Now can you compare an investor investing $1,000 with another investor investing $100,000? Obviously Not. This is how leverage works in stocks, 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 is simply known as Stocks Trading Leverage. This money that you borrow from your stock trading broker, you borrow it against the $1,000 dollar of your own money that you deposit with your stocks broker in your stock trading account. If you were to define what this stocks trading leverage means - then leverage is the ability to control a large amount of money using very little of your own money and borrowing the rest. Otherwise, if you were trade stocks trading without this stocks leverage it would not be as profitable as it is, in fact you can still select not to use stock trading leverage, using the 1:1 leverage ratio but you would not make money it would take too long to make any stocks trading profit.
Example of how to calculate stocks leverage and stocks margin:
Stocks 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 ratio = 100:1
1,000 / 100,000 * 100= 1%
Stocks Trading Margin required = 1%
(1/100 *100= 1%)
"Trade Forex Trading - Please simplify because I am a Stocks Trading Beginner"
(Simplify - your stocks trading capital is $1,000 - after stocks leverage you control $100,000 - $1,000 is what percent of $100,000 - it is 1%) that is your stocks trading margin requirement for your stocks trading account.
The stocks margin example illustrated and explained below, the set stocks leverage ratio is 100:1, the stocks 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 and borrowed the rest, with this leverage ratio 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 Panel - What is Stocks Trading Leverage for Stock Beginner Traders?
- If = 50:1 Stocks Trading Leverage Ratio
Then stocks trading margin requirement = 1/50 *100= 2 %
If you have $1,000,
1,000* 50 = $50,000.
1,000 / 50,000 * 100= 2%
(Simplify - your stocks capital is $1,000 after stocks leverage you now control $50,000 - $1,000 is what percentage of $50,000 - it's 2%) that is your stocks margin requirement
- If = 20:1 Stocks Trading Leverage Ratio
Then the stocks margin requirement = 1/20 *100= 5 %
If you have $1,000,
1,000* 20 = $20,000.
1,000 / 20,000 * 100= 5%
(Simplify - your stocks 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 Stocks Trading Leverage Ratio
Then the stocks margin requirement is = 1/10 *100= 10%
If you have $1,000,
1,000* 10 = $10,000.
1,000 / 10,000 * 100= 10%
(Simplify - your stocks 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's your stocks trading margin requirement
What's The Difference Between Maximum Stocks Trading Leverage & Used Stocks Trading Leverage?
However, you should note that there's a difference between maximum stocks trading leverage (stocks trading leverage given by your stocks trading broker which is the highest stocks leverage ratio you can trade with if you choose to) and used stocks trading leverage ( stocks trading leverage depending on the stocks lot size you have opened - open trade lots positions). One is the broker's (Maximum Stock Leverage Ratio) and the other is stocks trader's (Used Leverage Ratio). To explain this stocks leverage concept we shall use the stock trading example above:
If your stocks broker has given you 100:1 Maximum Stock Leverage Ratio, 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 Stocks Trading Leverage Ratio, but your maximum leverage ratio is still 100:1 Leverage. This means that even if you're given 100:1 Maximum Stocks Trading Leverage Ratio or 500:1 Maximum Stock Leverage Ratio, you do not have to use all of it. It is best to keep your used stocks leverage ratio to a maximum of 10:1 stocks trading leverage but you will still select 100:1 maximum stocks leverage ratio for your stocks 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 stock trades will not get closed by your stocks trading broker because this margin requirement will remain above the required level based on the free margin in your stock trading account.
When it comes to stocks - one of your rules: stocks trading money management guidelines on your stocks plan should be to use stocks leverage ratio of below 5:1.
In the above stocks trading example, the trader is using $2683.07, the total controlled amount is $268,307, but stocks 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 Stocks Trading Leverage Ratio
Stocks Trading margin accounts allow stock traders to control a big amount of currency using little of their own money while borrowing the rest
Obtaining this stocks trading margin account will enable you to borrow money from the broker to trade stocks trading lots with.
The amount of borrowing power your margin stocks account gives you what is called 'leverage', and is usually expressed as a ratio - a leverage ratio of 100:1 means you can control resources worth 100 times your deposit.
What this means in stocks terms is that with 1% margin in your stocks account you can control one standard stocks lot or 1 stocks trading contract worth $100,000 with a $1,000 deposit.
However, trading on this margin stocks account increases both potential for stocks trading profits as well as stocks trading losses. In stock trading you can never lose more than you invest, stocks trading losses are limited to your deposits and usually stocks brokers will close a stocks trade transaction that extends beyond your deposit amount by executing a stocks trading margin call. Stocks traders must therefore try to keep their stocks trading margin level above that required by their stock trading broker. By using stocks trading money management guide-lines and keeping your used stocks trading leverage ratio below 5:1.
What Is Stocks Trading Leverage for Stock Trading Beginners? - Do You Have To Use Leverage In Stocks? - Leverage in Stock - Stocks Leverage Example - Stocks Trading Leverage And Margin Explained - Stocks Trading Leverage Calculator
