What is the difference between leverage, margin and free margin?
These words confuse me. How do they connect, and when does a margin call happen?
For education only. This is not financial advice. Trading carries a high risk of loss.
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1 Answer
Best answer
- Leverage lets you control a larger position with a smaller deposit. With 1:100 leverage, $1,000 can control a position worth $100,000.
- Margin is the part of your money the broker sets aside to keep your open trades open.
- Free margin is your equity minus the used margin. It is what you still have available to open new trades or absorb losses.
Leverage does not reduce your risk. It only reduces the margin needed, and it makes profits and losses bigger.
If your equity falls too low compared with the margin (the margin level), the broker can issue a margin call and then close your trades automatically at the stop out level. These levels differ between brokers, so read yours.
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