Leverage trading: Is it safe?

Trading on margin means that you can have a position far greater than your capital implies. For example, you can buy CFDs in currency worth 50,000 million with only 1.000 million.

Here are some important concepts to understand margin trading:

Maintenance Margin

Maintenance Margin is the amount you should have provided your client with your online broker. If you are giving a margin position open, you must make sure that your balance on your account is less than the requirement for maintenance margin. Your online broker will state the requirement for maintenance margin for each trade you make on margin.

It is also important to note that the rule is different maintenance requirements margins depending on the financial instrument you act in. The maintenance margin requirement for CFD trading may be something completely different than trading in stocks, currencies or ETF trade.

Initial Margin

Initial Margin requirement is the account balance for you to open a new position. Your broker has different requirements for initial margin and you should familiarize yourself with the requirements that apply in your online broker before you begin with margin trading.

Margin call

If you are holding an open position, and the balance is below the minimum maintenance margin, your online broker to perform a forced sale - a margin call - thus closing your position.

Example margin call:

Has 1,200 dollars on your client. So you decide to buy 1:10 CFDs Coca Cola to 1080 dollars. You have successfully purchased 10 x 1080 = 10,800. Let us further assume that your online broker has an initial margin of 10% and the maintenance margin requirement of 5%, and in this case it means that is 5% of 10,800 is 540 million. You need 540 million in funds in your account to keep the position open. If your position falls below this level, shut it.