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Margin And Leverage

What Exactly Is Leverage?

Margin trading is used to increase an investor’s purchasing power. An investor is only required to put up a fraction of the funds required to open a much larger position. This means that 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.

A 1% minimum margin requirement is equivalent to 100:1 leverage. A leverage ratio of 10:1 is equal to 10%.

 

Margin Requirement & Intial Margin

The initial margin is the amount put up to open the position. It is also known as a “initial deposit” in some circles. The initial margin requirements will vary depending on the asset type, trading instrument, and intended trade size of the position in each market.

NOTE: Before engaging in leveraged trading, it is critical that you understand the concepts of margin and leverage. It is also advisable to practice trading with a demo account in a risk-free environment.

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