Stock Index Leverage & Margin Trading Explanation & Example

Margin required : It is the amount of money your stock indices broker requires from you to open a position. It is expressed in percentages.

Equity : It's the total amount of capital you have in your trading account.

Used margin : amount of money in your trading account which has already been used up when buying a stock indices contract, this contract is the one that's displayed in open trades. As a trader you can't use this amount of money after opening a trade because you have already used it & it is not available to you.

In other words, because your stock indices broker has opened up a position for you using the capital you have borrowed, you must maintain this usable margin for your trading account as a security to allow you to continue using this stock indices leverage he has given you.

Free margin : amount in your trading account which you can use to open new trade positions. This is the amount of money in your account which has not yet been stock indices leveraged because you've not yet opened a transaction with this money - this money also is very important for you as a investor because it enables you to continue holding your open trades as will be explained below.

However, if you over use stock indices leverage, this free margin will drop below a certain percent at which your stock indices broker will have to close all your positions automatically, leaving you with a big loss. The stock indices broker at this point closes all your open trade position because if your open positions are left open they would lose the money that you've borrowed from them.

This is why you should always make sure you have a lot of free margin. To do this never trade more than 5 percentage of your stock index account, in fact 2 percentage is recommended.

Difference Between Stock Indices Leverage Set by the Broker & Used Indices Leverage

If the set stock indices leverage is 100: 1, what it means is that you can borrow up to 100 dollars for every dollar you have in your account, but you do not have to borrow all the 100 dollars for every dollar you have you can decide you want to borrow 50:1 or 20:1. In this case though the leverage option is set at 100:1 your used stock index leverage will be the 50:1 or 20:1 that you have borrowed to make a trade.

Example:

You have 1000 dollars (Equity)

Set 100:1

Stock Indices Leverage Used = Amount used /Equity

If you buy stock indices lots equal to 100,000 dollars you'll have used

= 100,000/1000

= 100:1

If you buy stock index trading lots equal to 50,000 dollars you'll have used

= 50,000/1000

= 50:1

If you buy stock indices lots equal to 20,000 dollars you will have used

= 20,000/1000

= 20:1

In these 3 cases you can see that even though the set is 100:1

The used is 100:1, 50:1, 20:1 depending on the size of stock indices lots traded.

So Why not Just Select 10:1 option as the Maximum Stock Indices Leverage? Because to keep within the proper risk management rules it is even recommended that traders use less than this?

This question might seem straight forward but it's not, because when you trade you use borrowed money known A.K.A. Stock Indices Leverage. When you borrow capital from anyone or a bank you must maintain a security or collateral to acquire a loan, even if the security is based on monthly deduction from your salary, the same thing with Stock Indices.

In stock indices the security is known as margin. This is the capital you deposit with your broker.

This is calculated in realtime as you trade. To keep your borrowed money you must maintain what is known as the required capital (your deposit).

Now if Your Stock Indices Leverage is 100:1

When trading if you have $1,000 & use option 100:1 & buy 1 standard lot for $100,000 your margin on this transaction is the $1000 dollars in your account, this is the money that you will lose if your open trade goes against you the other $99,000 that is borrowed, they will close the open stock indices trades automatically once your $1,000 has been taken by the stock index market.

But this is if your stock indices broker has set 0% Stock Index Margin Requirement before closing your stock index trades automatically.

For 20% requirement before closing your stock index trades automatically, then your trade transactions will be closed once your balance gets to $200

For 50% requirement of this level before closing your stock index trades automatically, then your trade transactions will be closed once your balance gets to $500

If they set 100% requirement of this level before closing your open trade positions automatically, then your trade will be closed once your account balance gets to $1,000: Meaning the trade will closeout as soon as you execute it because even if you pay 1 pips spread your account balance will get to $990 & the needed percentage is 100% i.e. 1,000 dollars, therefore your orders will immediately get closed-out.

Most brokers don't set 100% requirement, but there are those who set 100% are not suitable for you at all, select those set 50% or 20% margin requirements, in fact, those index brokers that set their margin requirement at 20% are some of the best because the likely hood they closeout your trade is reduced as displayed in example above.

To know about this level which is calculated by your platform automatically - the MT4 Stock Indices Platform will display this as "Stock Index Margin Requirement", This will be displayed as a percent the higher the percentage the less likely your trades are to get closed.

For Example if

Using 100:1

If stock indices leverage is 100:1 and you transact stock indices lots equal to $10,000

$10,000 dollars divide by 100:1, your used capital is $100

Calculation:

= Capital Used * Percent(100)

= $1,000/$100 * Percent(100)

Stock Index Margin Requirement = 1,000 %

Investor has 980% above the required amount

Using 10:1

If stock indices leverage is 10:1 and you transact stock indices lots equal to $10,000

$10,000 dollars divide by 10:1, your used trading capital is $1000

Calculation:

= Capital Used * Percent(100)

= $1,000/$1000 * Percent(100)

Stock Index Margin Requirement = 100 %

Investor has 80% above the required amount

Because when a trader has a higher stock indices leverage means that they have more percent above what is required(A.K.A. More "Free Stock Index Margin") their open stock indices transactions are less likely to get closed. This is the reason why traders will choose the option 100:1 for their account but according to their risk management rules, these traders won't trade above 5:1.

These Zones are Shown on the Software Screen-Shot Below as an Examples:

MT4 Stock Indices Platform