Leverage & Margin in Stock Indices Trading

Main reason/explanation why online trading is popular is because of leverage. Unlike traditional markets where a stock index trader uses only their trading capital to trade with, in online market traders can borrow extra money from their broker and use this extra money together with their own money so that to have more capital to trade with.

For illustration if a trader has $10,000 in capital in the online market a trader can also borrow extra money when opening trades & open trade transaction of larger value than his $10,000 capital using leverage.

A trader can use leverage ratio of 100:1 which's the default leverage in the online trading market. For leverage 100:1 what this means is that a trader can borrow $100 for every $1 dollar that they have in their account. Therefore to calculate the total amount that a stock indices trader will borrow using leverage 100:1 then a stock index trader will multiply his invested capital by 100 times, therefore if a trader invests $10,000 multiplied by 100 times, then the total amount that a stock indices trader can now trade with is a total of $1,000,000. This is what makes the online trading market popular - Leverage.

Now that a trader will be trading on borrowed capital & as with every borrowed capital there is always a security that one must put down before accessing borrowed capital, what's the security for this leveraged amount?

The security for this leveraged amount is the capital that you open an account with - in this case $10,000. This $10,000 is known as margin - margin is the security for the leverage that you'll be using. Therefore, so as to continue accessing the leverage or the borrowed capital you must make sure that you do not lose your capital so that as to maintain this leveraged amount.

This is why as a trader you must do everything when it comes to learning about index trading so that as you as a Stock Index trader can continue making profit on the market and that way your account balance continues increasing and that way you continue having access to the leveraged amount.

How Do I Properly Trade with Leverage & Margin?

As a trader you need to know that just because you have been given 100:1 leverage you do not have to use all of it. If you want to trade this market for long you need to keep your used leverage to below 10:1. That way you don't blow your trading account in just a few trades, if you want to follow even better equity management you as a stock indices trader can even reduce your used leverage to a maximum of 5:1 - especially if your capital is $20,000 or $50,000 or $100,000. The more capital you have the less leverage you need to use so that as to better manage your capital so that as you trade longer.

The Difference between Maximum Leverage & Used Leverage

When your online broker gives and provides you leverage 100:1 this is referred to as maximum leverage, because it is the maximum set leverage for your account, but you don't have to use all of the leverage you only need to use about 10:1 or 5:1 leverage, this 10:1 or 5:1 leverage that you'll be using is known as Used Leverage.

Money Management and the Best Leverage to Use

It is best to keep your leverage use below 10:1 leverage so that as to better manage your money. It is best to keep your leverage low & this way you'll have enough Free Margin as compared & analyzed your used margin.

As long as you keep your leverage below 10:1 you'll have enough free margin & you'll be able to follow good money management rules.

If you use a lot of leverage you will be over-leveraging and you'll not be following the best money management rules & you'll be taking greater risk with your invested capital.

To keep your risk to a minimum do not over leverage & always keep your used leverage below 10:1 or even below 5:1.

Example illustration of Leverage & Margin

For leverage & margin let us show you an example of this leverage & margin & where these 2 can be found on the platform.

Leverage & Margin - Index Margin Calculation

Leverage & Margin Trading

On the above trading account the trading account balance is displayed & shown - $10,905

Profit is $159 dollars

The equity is $11,065

The Margin is $970 dollars - This is the margin used for the trades which are currently open

Free Margin is $10,094 dollars

The margin used is $970 which is about 8 % of the equity, equity is $11,000 - This means that the leverage used is 8:1.

The free margin is $10,094 dollars which is about 10 times the used margin, free margin that is not being used is a lot meaning for this account the good money management rules are being followed & the correct leverage, that is below 10:1 is being used.

As a trader you should am to keep all your trades close to these levels so that you're in a position to better manage your account and ensure you are not using too much leverage - over leveraging.

This way you as a stock indices trader can make good profit in your trading account while at same time not risking too much of your capital.

How Leverage is Used in Indices Transactions?

If you take an example of three index in the online market that are shown below:

1. Australia ASX 200 - AUS200Cash

Margin per 1 Lot - AUD 70

The margin or required capital by a trader to open AUS200Cash index is AUD 70, this is after applying leverage, if there was no leverage a indices trader would be required to put up the AUD 7000 as the trading capital.

2. Italy FTSEMIB40 - IT40Cash

Margin per 1 Lot - € 250

The margin or required capital by a trader to open IT40Cash index is € 250, this is after using leverage, if there was no leverage a indices trader would be required to put up the € 25,000 as the trading capital.

3. Spain IBEX35 - SPAIN35Cash

Margin per 1 Lot - € 140

The margin or required capital by a trader to open SPAIN35Cash index is € 140, this is after applying leverage, if there was no leverage a stock index trader would be required to put € 14,000 as the trading capital.

From the above exemplification you as a stock indices trader can see that leverage makes the online trading market available to most ordinary traders by reducing/decreasing the initial capital required by over 100 times using leverage ratio 100:1, this is the reason why stock index trading is becoming popular.

Learn More Topics & Lessons: