Margin, Leverage and You

Margin, Leverage and You

Trading (or investing) is not exactly a simple thing. Trading involves taking certain risks and using capital. For those who are cash-strapped or expect a higher absolute return, there is the option to borrow.

Borrowing capital for trading is known as margin trading or contract for differences (CFD). 

how-leverage-works

Here’s an excerpt of a post by our user, Wellhandy, that illustrates how margin trading works:

Margin, Leverage and You

Some of us use margin and leverage in our trading. They say leverage is a double edged sword so what do they mean?

Say stock A $1.00 and margin 10% and account size $100,000 and margin closeout level at 80% (each company is different).
you set a stop loss at $0.90 and take profit at $1.40 for instance.
Position sizing is a big big topic so we leave that for another day and say you determine the amount you are willing to risk for each position to be $1000.

What that means is you are risking $1000 (down by 10c to 90c) to earn $4000 (up by 40c to $1.40)
and your margin used is $1000 for 10K shares. (10% of $10K).

So that’s for stock A.

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