whats the difference between leverage and margin?
March 8th, 2010 by admin
I hear both terms being used. Aren’t they the same things? I’m talking about forex btw.
Please explain to me what a margin call is. How much of my account should I not invest with to avoid this, or does a margin call occur whenever the broker feels like it?
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You get a margin call from your broker when the amount of money in your account has fallen below the margin requirements. When you receive a margin call, you need to put some cash in your account or liquidate some assets to meet the margin requirement.
Leverage is a rate of money broker lends you and the money you invested. If a broker offers leverage 10:1, it means that if you invest $100, broker will allow you to trade with $1000 as this will significantly increase your potential profit.
Trading with leverage is a both-way risk as it can also increase your losses.
Margin call is already explained in previous answer. When you trade with leverage (loaned money) and start losing, broker issues a margin call to prevent you from losing money that belongs to the broker.
Hope this helps!
Best regards,
leverage is how much money/stock value you get to control out of your puny initial investments. for example, if your leverage is 1:100, that means you get to control USD100,000.00 worth of currency/stock for an initial investment of only USD1000.00
Margin is the initial investment you use to control your USD100,000.00 (in other words, the USD1000.00 is your margin).
Margin call is when your position has moved against you and the amount that you are currenty losing has reached whatever balance in your forex account.
For example: assuming that you are leveraged 1:100 and have USD5000.00 in your forex account.
You think that USD/JPY is gonna go up, so you bought/long one lakh for USD/JPY (costs USD1000.00). Now you only have USD4000.00 in your account.
Supposedly USD/JPY made a U-turn and fell. Your maximum losses you can sustain is 400 pips/points. this is because you only have USD4000.00 in your forex account
(USD10 per pip X 400 pips = USD4000.00)
-Now your forex broker considers this that your have LOST all of your money in this particular position and calls you to put in more money into your account (this is call a margin call). If the broker could not get you, they will automatically cut your position and take your USD4000.00. they then will deposit back your initial margin you used to buy/long in the 1st place which is the USD1000.00.