Margin vs. Leverage: The Difference Every Trader Needs to Know

What is Margin - An Explanation as a Guarantee, Not a Cost

When starting to trade, the term “margin” can often be confusing. Many people think it is a fee or financial cost, but in reality, margin is simply the collateral that a broker sets aside.

When you open a trading position, the broker will “lock” or “deduct” a portion of the funds in your account. This amount depends on the size of the position you open. For example, if you want to control a $100,000 trading position and the broker sets a margin requirement of 1%, you will only need to put up $1,000 as collateral.

This is the essence of margin - you are not paying a cost, but the broker will deduct $1,000 from your account to ensure you can cover potential losses. When you close the position, this collateral is immediately released back to your account.

How to Correctly Calculate Margin

Calculating margin is very simple, based on the formula:

Margin = Current Contract Value × Margin Ratio (%)

To understand better, suppose you open a leverage of 200:1 (which is equivalent to a margin requirement of 0.5%). If you buy a mini lot worth $10,000, you only need to have collateral of $50 which can be calculated as $10,000 × 0.5% = $50 .

This is the power of margin - you can control large contracts with a small amount of capital. But remember, profits and losses also amplify proportionally.

Maintenance Margin - When the Broker Has Authority

If the initial margin is the amount you pay to open a position, maintenance margin or MM (is the minimum amount your account must maintain to keep the position open.

The broker requires your funds to be at least 50% of the initial margin )or as specified in the platform’s terms(. If your funds fall below this level, you will face a Margin Call.

For example: if you pay an initial margin of $1,000, the maintenance margin will be )as long as your account balance remains above (. Your position stays safe, but if trading losses reduce your funds to ), you will need to deposit more money $500 to maintain your position.

How to Calculate Maintenance Margin

This formula helps you estimate risk:

**Maintenance Margin = Real-time Contract Value × Maintenance Margin Ratio $500 %$400 **

Maintenance Margin Ratio $100 ( = Margin Ratio )( × 50%

If the initial margin is 0.5%, the maintenance margin ratio will be 0.25%. This means you need to keep enough funds to meet this threshold, preventing the system from closing your position without consent.

Margin Call - A Warning Signal from the Broker

When your funds fall below the maintenance margin level, the broker will send you a Margin Call notification. This is a warning that you need to deposit more funds to keep your position.

In the worst-case scenario, if you do not respond to the Margin Call, the broker has the right to close your position without permission. This underscores the importance of good fund management - avoid over-leveraging.

The Relationship Between Margin and Leverage

Margin and leverage are interconnected. A leverage of 200:1 means the margin requirement is only 0.5%. The higher the leverage, the lower the margin requirement, allowing you to control larger positions with less capital.

But this is a double-edged sword - if the market moves against you, profits or losses will also magnify significantly. Small factors can lead to total loss.

Summary: What Traders Must Remember

• Initial Margin is the collateral needed to open a trading position, not a cost or fee. This amount will be “locked” and returned after closing the position.

• Maintenance Margin is the minimum amount to keep in your account to keep the position open, generally about 50% of the initial margin.

• Margin Call occurs when your funds drop below the maintenance margin level - a signal to deposit more funds immediately.

• Leverage and Margin work together; high leverage means low margin requirement but also higher risk.

A thorough understanding of margin will help you manage your account wisely and avoid unnecessary risks.