Explain What is Indices Trading Leverage? Explain What is Indices Trading Margin?
The definition of Indices Trading Leverage is having the ability to control a large amount of money using very little of your own money and borrowing the rest - this is what makes the stock indexes trading market to attract many investors.
We shall explain indices trading leverage first and then explain indices trading margin in this learn how to calculate stock indexes trading leverage and margin tutorial.
We shall us this example to explain what indices trading leverage is? If your indices broker gives you stock indices leverage of 100:1 (this is the best option to choose as the maximum stock indices leverage for any indices trading account)
This means you borrow 100 dollars for every dollar you have in your stock indexes trading account.
To put in another way your indices broker gives you 100 dollars for every 1 dollar in your trading account. This is what is known as stock indexes trading leverage.
This means if you open an account with $1,000 and your stock indices leverage is 100:1, then your get $100 for every $1 you have, the total amount you will control is:
If for 1 dollar the indices broker gives you 100
Then if you have 1,000 you will get a total of:
$1,000 * 100 = 100,000 dollars
Now you control 100,000 dollars of Investment
Most new indices traders ask what stock indices leverage is best stock indices leverage for 1,000 dollars, or 2,000 dollars, or 5,000 dollars indices trading account? - The best stock indices leverage option to choose when opening a live stock indexes trading account is always 100:1 and not 400:1.
What is Indices Trading Margin?
Indices Trading Margin is the amount of money required by your indices broker so as to allow you to continue trading with the borrowed amount.
In other words the question what is margin in Indices Trading? can be explained as the money required to cover open stock indexes trades and is expressed in percentage. For 100:1, the amount you will control is 100,000 dollars as explained in the above example.
Now can you compare someone investing $1,000 with another one investing $100,000? Obviously Not. This is how it works, it takes you from that guy investing $1,000 to that one investing $100,000. Where does this extra money come from? You borrow from your indices broker in what is simply known as Indices Trading Leverage. This money that you borrow, you borrow it against the $1,000 dollar of your own money that you deposit with your stock indexes trading broker. If you were to explain what this indices trading leverage means - then it is the ability to control a large amount of money using very little of your own money and borrowing the rest. Otherwise, if you were trade Indices Trading without this indices trading leverage it would not be as profitable as it is, in fact you can still choose not to use stock indexes trading leverage, using the 1:1 option but you would not make money it would take too long to make any profit.
Example of how to calculate stock indexes trading leverage and margin:
Indices Trading Margin required in this case is 1,000 dollars (your money) if it is expressed as a percent of 100,000 dollars in your indices trading account which you control it is:
If indices trading leverage = 100:1
1,000 / 100,000 * 100= 1%
Margin required = 1%
(1/100 *100= 1%)
"Trade Forex Trading - Please simplify because I am Beginner"
(Simplify - your capital is $1,000 after stock indices leverage you control $100,000 - $1,000 is what percent of $100,000 - it is 1%) that is your margin requirement for your stock indexes trading account.
The indices trading margin example explained and illustrated below, the set stock indices leverage is 100:1, the margin which is 1% is $2683.07, therefore the total amount controlled by the indices trader is: $268,307 - this is because with this indices trading leverage the indices trader has used little of his money and borrowed the rest, with this set at 100:1, the indices trader is using 1 % of their capital, this 1% is $2683.07, if 1% is $2683.07 then 100% is $268,307
Indices Trading Leverage and Margin Explained
- If = 50:1 Indices Trading Leverage
Then margin requirement = 1/50 *100= 2%
if you have $1,000,
1,000* 50 = $50,000.
1,000 / 50,000 * 100= 2%
(Simplify - your capital is $1,000 after stock indices leverage you control $50,000 - $1,000 is what percent of $50,000 - it is 2%) that is your indices trading margin requirement
- If = 20:1 Indices Trading Leverage
Then the requirement = 1/20 *100= 5%
if you have $1,000,
1,000* 20 = $20,000.
1,000 / 20,000 * 100= 5%
(Simplify - your trading capital is $1,000 after stock indices leverage you control $20,000 - $1,000 is what percent of $20,000 - it is 5%) that is your indices trading margin requirement
- If = 10:1 Indices Trading Leverage
Then the requirement is = 1/10 *100= 10%
if you have $1,000,
1,000* 10 = $10,000.
1,000 / 10,000 * 100= 10%
(Simplify - your trading capital is $1,000 after stock indices leverage you control $10,000 - $1,000 is what percent of $10,000 - it is 10%) that is your indices trading margin requirement
What is The Difference Between Maximum Indices Trading Leverage and Used Indices Trading Leverage
However, you should note that there is a difference between maximum indices trading leverage ( indices trading leverage given by your indices broker which is the highest stock indices leverage you can trade with if you choose to) and used indices trading leverage ( indices trading leverage depending on the lots you have opened/open positions). One is the broker's (Maximum Indices Trading Leverage) and the other is trader's (Used Indices Trading Leverage). To explain this indices trading leverage concept we shall use the stock indexes trading example above:
If your indices broker has given you 100:1 Maximum Indices Trading Leverage, but you only open a trade of 10,000 dollars then Used Indices Trading Leverage is:
10,000 dollars: 1,000 dollars (your money)
Your have used 10:1 Indices Trading Leverage, but your maximum is still 100:1 Indices Trading Leverage. This means that even if you are given 100:1 Maximum Indices Trading Leverage or 400:1 Maximum Indices Trading Leverage, you do not have to use all of it. It is best to keep your used indices trading leverage to a maximum of 10:1 but you will still select 100:1 maximum stock indices leverage option for your trading account. The extra indices trading leverage will give you what we call Free Indices Trading Margin, As long as you have some Free margin on your indices trading account then your trades will not get closed by your indices broker because this margin requirement will remain above the required level.
When it comes to indices trading one of your rules: indices trading money management rules on your trading plan should be to use indices trading leverage below 5:1.
In the above image example, the indices trader is using $2683.07, the total controlled amount is $268,307, but account equity is $16,116.55, therefore used stock indices leverage is ($268,307 divide by 16,116.55) = 16.64 : 1
16.64 : 1 Used Indices Trading Leverage
Indices Trading Margin accounts allows traders to control a large amount of indices trading units using little of their own while borrowing the rest
Obtaining this indices trading account will enable you to borrow money from the indices broker to trade indices lots with.
The amount of borrowing power your account gives you what is called “ indices trading leverage”, and is usually expressed as a ratio - a ratio of 100:1 means you can control resources worth 100 times your deposit.
What this means in Indices Trading terms is that with 1% margin in your indices trading account you can control a trade worth $100,000 with a $1,000 deposit.
However, Trading this indices trading account increases both potential for profits as well as losses. In Indices Trading you can never lose more than you invest, losses are limited to your deposits and usually brokers will close a transaction that extends beyond your deposit amount by executing a margin call. Indices traders must therefore try to keep their margin level above that required. By using indices trading money management rules and keeping your used indices trading leverage below 5:1.