Stock Leverage & Margin Trading Explanation and Examples

Margin required : It's the amount of money your stock broker requires from you to open a position. It is expressed in percents.

Equity : It is the total amount of capital you have in your trading account.

Used margin : amount of money in your account that has already been used up when buying a stock trading contract, this contract is one that is displayed in the open trades. As a trader you cannot use this amount of money after opening a trade because you have already used it & it is not available to you.

In other words, because your stock broker has opened up a position for you using the capital you have borrowed, you must maintain this usable margin for your account as a security to allow you to continue using this stock leverage he has given you.

Free margin : amount in your account which you can use to open new trades. This is the amount of money in your trading account which hasn't yet been stock leveraged because you've not yet opened a trade using this money - this is also very important for you as a trader because it enables you as a trader to continue holding your open trades as described and shown below.

However, if you over use stocks trading leverage, this free margin will drop below a certain percent at which your stocks broker will have to close all your positions automatically, leaving you with a big loss. Stocks broker at this point automatically closes all your open trade position because if your trade positions are left open the broker would lose the money you'll have borrowed from them.

This is why you should always make sure you've a lot of free margin. To do this never trade more than 5 percent of your stocks account, in fact 2 percent is recommended.

Difference Between Stock Leverage Set by the Broker and Used Stocks Trading Leverage

If the set stocks leverage is 100: 1, it means you can borrow up to 100 dollars for every dollar that you've, but you don't have to borrow all of the 100 dollars for every dollar that you've, but you can decide to borrow 50:1 or 20:1. In this case even though the leverage ratio option set 100:1 your used stock trading leverage will be the 50:1 or 20:1 that you've borrowed to make a trade.

Example:

You have 1000 dollars (Equity)

Set 100:1

Stock Leverage Used = Amount used /Equity

If you buy stock lots equal to 100,000 dollars you will have used

= 100,000/1000

= 100:1

If you buy stock lots equal to 50,000 dollars that you will have used

= 50,000/1000

= 50:1

If you buy stock lots equal to 20,000 dollars that you will have used

= 20,000/1000

= 20:1

In these three cases you can see that even though the set is 100:1

The used is 100:1, 50:1, 20:1 depending on size of stock lots traded.

So Why not Just Choose 10:1 option as the Maximum Stock 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 is not, because when you trade you use borrowed money known A.K.A. Stock 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 Stock Trading.

In stock trading the security is known as margin. This is the 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 Stock Trading Leverage is 100:1

When trading if you have $1,000 & use option 100:1 and buy 1 standard lot for $100,000 your margin on this transaction is the $1000 dollars in your account, this is the money that you'll lose if your open trade goes against you the other $99,000 that is borrowed, they will close the open stock trades automatically once your $1,000 has been taken by the stock market.

But this is if your stock broker has set 0% Stock Margin Requirement before closing your stocks trades automatically.

For 20% requirement before closing your stocks trades automatically, then your trades will be closed once your trading account balance gets to $200

For 50% requirement of this level before closing your stocks trades automatically, then your trades will be closed once your trading 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 trading account balance gets to $1,000: Explanation trade will close-out as soon as you the trader executes it because even if you were to pay 1 pip spreads your trade account balance will navigate to $990 and the needed percent is 100% i.e. 1,000 dollars, therefore your orders will immediately get closed out.

Most brokers do not 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 stock brokers that set at 20% are some of the best because the likely hood they close-out your trade is reduced as displayed in the examples above.

To know about this level which is calculated by your trading platform automatically - The MT4 Stock Platform will display this as "Stock Trading Margin Requirement", This will be displayed as a percent the higher the percentage the less likely your trades are to get closed.

For Example if

Using 100:1

If stock leverage is 100:1 & you transact stock lots equal to $10,000

$10,000 dollars divide by 100:1, used capital is $100

Calculation:

= Capital Used * Percentage(100)

= $1,000/$100 * Percent(100)

Stock Margin Requirement = 1,000 %

Investor has 980% above required amount

Using 10:1

If stock leverage is 10:1 & you transact stock lots equal to $10,000

$10,000 dollars divide by 10:1, used capital is $1000

Calculation:

= Capital Used * Percentage(100)

= $1,000/$1000 * Percent(100)

Stock Margin Requirement = 100 %

Investor has 80% above the required amount

Because when a trader has a higher stock leverage means that they have more percent above what's required(A.K.A. More "Free Stock Trading Margin") their open stock trading transactions are less likely to get closed. This is reason why investors will choose the option 100:1 for their account but according to their risk management rules, these investors will not trade above 5:1.

These Levels are Shown on The Software Image Below as an Example:

MT4 Stock Trading Software