A Simple Explanation for All Types of Investors
Let’s break down leverage and margin in a way that’s easy for both beginner and experienced investors to understand.
Leverage allows you to control a large investment using little of your own money and borrowing the rest from your broker. It’s like buying a house with a small down payment and getting a mortgage for the rest.
Example: Imagine you want to control a R100 000 position in the market. Instead of needing R100 000 of your own money, BROKSTOCK only requires you to put up R20 000. That means you’re using 5:1 leverage, you now control R100 000 with just R20 000.
If your R100 000 investment grows 20%, you’d make R20 000 but since you only invested R20 000, that’s a 100% return on your money. Conversely, if the value drops 20%, you lose your entire R20 000 investment.
This highlights the power and risk of leverage. Gains can be magnified, but so can losses.
Margin is the amount of money you need to put down to open a leveraged position. Think of it as a security deposit that ensures you can cover potential losses.
Example: To control a R100 000 position using 5:1 leverage, BROKSTOCK asks for R20 000. That R20 000 is your margin. It’s the money you need to deposit to take that R100 000 position.
The margin is usually a percentage of the full trade amount. BROKSTOCK requires a 20% margin. This means you need 20% of the total position size to open a trade. The leverage you can use is based on this margin requirement.
Here’s a quick reference for better understanding:
● 20% margin means 5:1 leverage
● 10% margin means 10:1 leverage
● 1% margin means 100:1 leverage
● Margin Requirement: The percentage your broker needs to open a position. For example, a 20% margin requirement means you need R20 000 to control R100 000.
● Portfolio Total: The total amount of money in your trading account.
● Used Margin: The amount your broker holds to keep your positions open. You can’t use this money until you close the position.
● Available Funds: The money in your account that’s free to open new positions.
● Margin Call: If your account value drops significantly and can’t cover potential losses, your broker will ask you to deposit more money. If you don’t, your broker will close your positions to limit losses.
● Leverage allows you to control a larger position with less of your own money.
● Margin is the deposit you need to put down to use leverage. Both leverage and margin can magnify gains but also increase risk, so use them wisely.
