What Exactly is Leverage?
Leverage, often used in margin trading, is a strategy to increase an investor’s purchasing power. An investor is only required to put up a fraction of the funds needed to open a much larger position. Instead of paying the full value of the position, you only need to pay a percentage of it, known as the 'initial margin'.
The Leverage Ratio
The leverage ratio and margin requirements vary by broker. The leverage offered will also be determined by the size of the trade. For example, a 1% minimum margin requirement is equivalent to 100:1 leverage, while a leverage ratio of 10:1 is equal to a 10% margin requirement.
Margin Requirement & Initial Margin
The initial margin is the amount required to open the position, also known as the “initial deposit.” Initial margin requirements vary depending on the asset type, trading instrument, and the intended trade size of the position in each market.
Note: Before engaging in leveraged trading, it is critical to understand the concepts of margin and leverage. Practicing trading with a demo account in a risk-free environment is also advisable to gain familiarity and reduce risk.