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What is Leverage and Margin

In margin trading, leverage means being able to manage a larger position than your actual investment. Your capital is considered collateral and you are offered a proportionally larger position by a brokerage company. Leverage can potentially amplify your gains as well as your losses.

Traders can use leverage to take larger positions in the market than their initial investment. For example, if you wanted to buy CFDs for 1 lot of Facebook shares without leverage, you would need to pay the whole sum, matching the current price of Facebook shares. But with leverage, you only need to deposit a certain percentage to control a position for Facebook shares in CFD markets.

The smaller portion you deposit is called margin or collateral. Depending on the asset and the regulations, you will be required to invest only a part of the necessary deposit. In most cases, the ratio for stock CFDs will be 20:1 for European regulations (and 50:1 for outside of Europe). This means you would only need to deposit 5% of what is necessary to trade 1 lot of Facebook shares in CFD markets.

As the price for Facebook stocks change with each price movement, your position in the market will make 20 times bigger moves to match it. Your gains or losses will proportionally change as well. While your gains are magnified with the leverage, your losses are also subject to the magnification.

If your margin falls below a certain threshold, your position will automatically be closed. But even so, keep in mind that you may lose more than your initial investment due to rapid price changes. Thus, it is vital to place protective measures such as ‘stop-loss’ orders to avoid such scenarios.

InvestCore warns you if your margin falls below predetermined levels. This is called the margin call. If you receive a margin call from your CFD provider, you need to increase your equity in order to free more margin and to keep your position open. If your margin is too little to keep up with the change, you will need to top up your account balance with another deposit.