What is leverage?
Leverage is a ratio between the amount of guarantee and the trading operation volume.
Sounds difficult, right?
Let's put it simply!
In other words, leverage is a loan provided by the company to cover the cost of order execution that is above your margin. It allows you to make a considerable profit, even with small investments.
Let's look at an example:
When trading, you trade with lots. A standard lot equals 100 000 units of the base currency, but it doesn't mean you have to invest such a huge amount of money yourself. Your broker can help you by providing leverage, which covers a part of the required amount. Let's say the leverage is 1:100, which means you cover only 1/100 of the required amount.
If you want to trade one standard lot of the USD instrument (e.g. USDJPY), you have to deposit and use just $1 000. Your broker will cover the remaining $99 000.
However, this doesn't mean you'll see $100 000 on your balance: leverage allows you to trade with bigger lots but doesn't influence your equity.
FBS provides other sizes of leverage too. You can check the leverages and leverage limits here.
Kindly note that the bigger leverage is, the more risks a trader is likely to encounter.
So, what is a margin in trading?
Now that you know what leverage is, understanding the margin is easy: margin is a necessary sum you need to maintain open positions; it's the amount you cover yourself. It equals 1-2% of the position size and
|Leverage||Margin requirement||The margin requirement for one EURUSD lot (or €100 000)|
|1:3000||0.033333333% or 1/30%||$3.3333333 or €31∕30|
Leverage and margin are connected. The margin requirement depends on your leverage ratio, the lot size, and the instrument. In MetaTrader, you can see the margin for each specific order.
Your trading platform will also show you the free margin available on your account and margin level figures.
A free margin is money in your account that is not used in the current trading and allows you to open new positions.
The margin level is the percentage that shows how much of your funds are not being used now.
In case of loss, your margin level will go down, and to avoid losing all of the money, brokers use the so-called margin call.
A Margin Call is a specific margin level (at FBS, it equals 40%) that, once reached by the trader, initiates a warning to make sure the trader either closes the losing trades or deposits more funds into the account to maintain current trading. The margin level is connected with Stop Out.
Stop Out is the minimum margin level at which the trading server automatically closes open positions to prevent further losses. Stop Out will be triggered if the margin level falls to 20% or less.
Please refer to this article to learn more about the reasons of the margin call being triggered.