Understanding Leverage and Margin

What Are Leverage and Margin in Trading?

The world of trading can be a minefield of jargon and language that doesn’t make sense unless you’re in the know.

Leverage and margins are two such concepts.

In this article, you will learn more about leverage and margins, their risks and how to manage these when trading with leverage on the Plus500 platform.

80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. *CFD trading via Plus500’s demo account.

What Is a Margin?

The margin is the amount that is deposited, which will be a percentage of the total trade value. Margin trading accounts will have a margin requirement. This is the minimum amount of money required to open and maintain an account with a leverage broker.

When trading, you will have a free margin and a used margin. Your free margin will be the amount of money available to trade with, and the used margin will represent the amount of your margin that is currently invested.

What Is Leverage?

Leverage is essentially a form of borrowing that allows for the potential to make higher returns on investments or trades. It acts as a way of increasing your exposure to changes within the markets, which also increases your potential for both profit and loss.

Your margin deposit can be leveraged at a ratio that increases its value. For example, if a leverage trade has a ratio of 10:1, this means that every $1 you invest is worth $10. So, if you invested $10, the value of that trade would be $100.

Leverage and Margins in Contract for Difference Trading

Contract for difference trading (CFD) is the name given to the form of market trading that uses margins and leverage.

80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. *CFD trading via Plus500’s demo account.

How Does Leverage Work on Plus500?

Using the Plus500 trading platform, it’s possible to use leveraged trading to increase your returns. For non-professional traders, this is capped at a ratio of 1:30.

The margin requirements for each trade are clearly displayed to make it easier to see how much your initial investment would need to be. This means that you can quickly identify the trades that are more affordable and allows you to spread your trades across a range of options.

Trading can be risky, which is why Plus500 also offers a range of tools to help protect investors from losing funds. Built-in negative balance protection and risk warnings will help to notify you if your investments are at risk.

What Are the Benefits of Trading With Leverage?

Leverage trading can be a good way of maximizing your returns with a smaller amount of initial capital. By working within margin requirements, you can spread your trades and investments across a wider range of options.

This gives the potential for higher returns and optimizes your trades across the market. It also frees up funds for other trades, as you won’t be investing all of your money in one thing.

However, it’s important to remember that all forms of trading come with risk. While leverage trading works to increase the potential for returns, it can also increase the potential for losses. Using risk management tools can help to avoid this.

What Are the Risks of Using Leverage and Margin?

All forms of trading inherently come with some level of risk. For leverage trading, this includes the amplification of losses, margin calls, and the risk of account depletion, as well as the potential psychological risks.

Amplification of Losses

Leverage trading increases the potential for gains, but this also means that there is the potential for increased losses.

Margin Calls

Margin calls are a function available to traders that notifies them that their accounts are falling below the required level for maintenance.

With a Plus500 account, this helps you to manage your risks by notifying you of the need to deposit more funds and automatically closing any open positions to minimize further losses.

Account Depletion

To keep your leverage account functional, you need to ensure that your margin requirements are met.

If you don’t keep a close eye on the available margin funds and ensure that you are consistently meeting the maintenance margin, this could lead to account depletion and result in your account not being able to be maintained.

Psychological Risks

Trading exposes you to the potential of extreme highs and extreme lows. This can result in feeling emotionally drained, stressed, or anxious.

With leverage trading, the risks of highs and lows are increased, so this means that the potential psychological impact is increased too.

How to Manage Risk When Trading With Leverage on Plus500

Plus500 offers traders a comprehensive array of tools to minimize risks and encourage responsible trading.

These tools help to support users in protecting their capital while also enabling them to maximize their profits.

Stop-Loss Order

A stop-loss order is a function that can be placed on your Plus500 account to automatically pull out of trades when the loss reaches a specified amount.

This prevents further losses and helps to protect your funds.

Take-Profit Orders

In a similar way to a stop-loss, a take-profit order is an automatic function that can be placed on your trading account.

The difference with a take-profit is that rather than minimizing loss, it’s designed to secure your profits by closing a trade at a point when a specified profit level has been reached.

Guaranteed Stop-Limits

Guaranteed stop-limits put a limit on how much loss your account will suffer before your trades are automatically closed.

These limits are designed to help protect your investments and automatically occur when the markets hit a specified point. You can adjust the stop-limits in your account.

Lower Leverage Levels

Starting with lower leverage levels will mean that you can start with smaller investments before growing your account in a way that feels comfortable.

Lower limits may mean that the potential for profit is slightly lower when compared to a higher leverage level. It also means that you’re more likely to make a profit and offers you an opportunity to better understand how leveraging works in the real world.

Margin Buffers

It’s always a good idea to ensure that your account has a margin buffer. This is a reserve of funds held within your trading account that helps to protect against losses.

Demo Accounts

Plus500 offers investors the opportunity to use demo accounts. This means that you can practice leverage trading and familiarize yourself with the processes and tools available on your account.

It also can help you to gain a better understanding of your individual risk-taking comfort level before investing any of your own money.

80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. *CFD trading via Plus500’s demo account.

Frequently Asked Questions

Final Thoughts

Leverage trading can be an excellent way to maximize profits while also minimizing your initial expenditure. By leveraging your margins and maintaining your account properly, you will have the potential to enjoy increased gains and optimize your trading potential.

However, it also comes with increased risks. Making sure to use a platform like Plus500 for secure and well-regulated trading will help you to minimize your risks. Options like stop limits and margin calls offer users additional security and peace of mind when it comes to making their trades.

WikiJob does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. *CFD trading via Plus500’s demo account.