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What’s the difference between leverage and margin, in CFD trading?

December 5, 2022

Leverage and margin are two related concepts in CFD (contract for difference) trading. Leverage refers to the use of borrowed capital to increase the potential return on an investment. For example, if a trader has $1,000 in their account and they use 100:1 leverage, they can trade up to $100,000 worth of a particular asset. This means that the trader’s potential return (or loss) is magnified by the leverage ratio.

Margin, on the other hand, refers to the amount of capital that the trader must deposit in their account as collateral for the leverage. In the example above, if the trader uses 100:1 leverage and the margin requirement is 2%, they must deposit $2,000 in their account as collateral. This should be corrected to: In the example above, if the trader uses 100:1 leverage and the margin requirement is 1%, they must deposit $1,000 in their account as collateral ($100,000 * 1% = $1,000). This means that the trader can trade up to $100,000 worth of the asset, but if the value of the asset falls below the margin requirement, the trader may be subject to a margin call and be required to deposit additional funds to maintain their position.

In summary, leverage allows traders to trade larger positions than they would be able to with their own capital, but it also increases the potential risks and rewards of their trades. Margin is the collateral required to use leverage, and it helps to protect the broker from potential losses.

“Given the nature of market, the chance of a crash is always greater than the chance of an overnight runaway euphoria.” – Jeff Yass

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