Explain What is Indices Leverage? Explain What is Stock Indexes Margin?
The definition of Indices 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 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 broker gives you indices leverage of 100:1 (this is the best option to choose as the maximum indices leverage for any indices 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 leverage.
This means if you open an account with $1,000 and your 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 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 indices leverage is best indices leverage for 1,000 dollars, or 2,000 dollars, or 5,000 dollars indices account? - The best indices leverage option to choose when opening a live Indices account is always 100:1 and not 400:1.
What is Stock Indexes Margin?
Stock Indexes Margin is the amount of money required by your 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 Leverage. This money that you borrow, you borrow it against the $1,000 dollar of your own money that you deposit with your indices broker. If you were to explain what this indices 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 without this leverage it would not be as profitable as it is, in fact you can still choose not to use 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 indices leverage and margin:
Indices 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 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 indices leverage you control $100,000 - $1,000 is what percent of $100,000 - it is 1%) that is your margin requirement for your indices account.
The indices margin example explained and illustrated below, the set 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 leverage the 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 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 indices leverage you control $50,000 - $1,000 is what percent of $50,000 - it is 2%) that is your indices margin requirement
- If = 20:1 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 indices leverage you control $20,000 - $1,000 is what percent of $20,000 - it is 5%) that is your indices margin requirement
- If = 10:1 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 indices leverage you control $10,000 - $1,000 is what percent of $10,000 - it is 10%) that is your indices margin requirement
What is The Difference Between Maximum Indices Trading Leverage and Used Leverage
However, you should note that there is a difference between maximum indices leverage ( indices leverage given by your indices broker which is the highest indices leverage you can trade with if you choose to) and used indices leverage ( indices 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 Leverage). To explain this indices 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 Leverage is:
10,000 dollars: 1,000 dollars (your money)
Your have used 10:1 Leverage, but your maximum is still 100:1 Leverage. This means that even if you are given 100:1 Maximum Indices 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 leverage to a maximum of 10:1 but you will still select 100:1 maximum indices leverage option for your trading account. The extra indices 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 trading indices one of your rules:money management rules on your trading plan should be to use indices leverage below 5:1.
In the above image example, the trader is using $2683.07, the total controlled amount is $268,307, but account equity is $16,116.55, therefore used indices leverage is ($268,307 divide by 16,116.55) = 16.64 : 1
16.64 : 1 Used Leverage
Indices Margin accounts allows traders to control a large amount of currency 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 “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 terms is that with 1% margin in your indices 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 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. Traders must therefore try to keep their margin level above that required. By using money management rules and keeping your used leverage below 5:1.