Explain What's Indices Leverage? Explain What is Stock Indices Margin?

The definition of Indices Leverage is having the ability to control a large amount of money using very little of your own money and borrowing the rest - this is what makes the stock indices trading market to attract many investors.

We shall explain indices leverage first and then explain indices margin in this learn how to calculate stock indices leverage and margin guide.

Example:

We shall us this example to explain what indices leverage is? If your broker gives you indices leverage of 100:1 (this is best option to select as the maximum indices leverage for any indices account)

This means you borrow 100 dollars for every dollar you have in your stock indices trading account.

To put in another way your indices broker gives you 100 dollars for every 1 dollar in your account. This is what's known as leverage.

This means if you open an account with $1,000 & your index leverage is 100:1, then you get $100 for every $1 you that you have in your indices account, the total amount which you will control is:

If for 1 dollar the broker gives you 100

Then if you have 1,000 you'll get a total of:

$1,000 * 100 = 100,000 dollars

Now you control 100,000 dollars of Investment

Most new indices traders ask what indices leverage is best indices leverage for 1,000 dollars, or 2,000 dollars, or 5,000 dollars indices account? - The best indices leverage option to select when opening a live Indices account is always 100:1 & not 400:1.

What's Stock Indices Margin?

Stock Indices Margin is the amount of money required by your broker so that to allow you to continue trading with borrowed amount.

In other words the question what's margin in Indices Trading? can be described as the money required to cover open stock indices trades & is expressed in percent. For 100:1, the amount you will control is 100,000 dollars as described in the above examples.

Now can you compare a investor investing $1,000 with another one that is investing $100,000? Obviously Not. This is how it works: it takes you from that retail investor investing $1,000 to that investing $100,000. Where does this extra cash come from? - You borrow it from your indices broker in what's simply referred to as Leverage. This money that you borrow, you borrow it against the $1,000 dollar of your own money which you deposit with your indices broker. If you were to explain what this indices leverage means - then it is the ability to control a big amount of money using very little of your own money and borrowing the rest. Otherwise, if you were trade Indices without this leverage it would not be as profitable as it is, in fact you can still choose not to use leverage, using the 1:1 leverage option but you would not make money and it would take too long to make any profit.

Example of how to calculate indices leverage & margin:

Indices Margin required in this case is 1,000 dollars (your money) if it's expressed as a percentage of 100,000 dollars in your indices account which you control it is:

If indices leverage = 100:1

1,000 / 100,000 * 100= 1%

Margin required = 1%

(1/100 *100= 1%)

'Trade Forex Trading - Please simplify because I am Beginner'

(Simplify - your capital is $1,000 after indices leverage you control $100,000 - $1,000 is what percent of $100,000 - it is 1%) that is your margin requirement for your indices account.

The indices margin example explained and illustrated below, the set index leverage ratio is 100:1, margin which is 1% is $2683.07, therefore the total amount controlled by indices trader is: $268,307 - this is because with this leverage the trader has used little of his money and borrowed the rest, with this set at 100:1, trader is using 1% of their capital, this 1% equals to $2683.07, if 1% equals to $2683.07 then 100% is $268,307

Indices Trading Leverage & Margin Discussed

• If = 50:1 Leverage

Then margin requirement = 1/50 *100= 2%

If you have $1,000,

1,000* 50 = $50,000.

1,000 / 50,000 * 100= 2%

(Simplify - your capital is $1,000 after indices leverage you now control $50,000 - $1,000 is what percentage of $50,000 - it's 2 %) that's your indices margin requirement

• If = 20:1 Leverage

Then the requirement = 1/20 *100= 5%

If you have $1,000,

1,000* 20 = $20,000.

1,000 / 20,000 * 100= 5%

(Simplify - your trading capital is $1,000 after indices leverage you now control $20,000 - $1,000 is what percent of $20,000 - it's 5 %) that's your indices margin requirement

• If = 10:1 Leverage

Then the requirement is = 1/10 *100= 10%

If you have $1,000,

1,000* 10 = $10,000.

1,000 / 10,000 * 100= 10%

(Simplify - your trading capital is $1,000 after indices leverage you now control $10,000 - $1,000 is what percent of $10,000 - it's 10 %) that's your indices margin requirement

What is Difference Between Maximum Indices Leverage and Used Leverage?

However, you should note that there's a difference between maximum indices leverage ( indices leverage given by your indices broker which is the highest indices leverage you can trade with if you select to) and used indices leverage ( indices leverage depending on the lots you have opened/open trades). One is the broker's (Maximum Indices Leverage) & the other is trader's (Used Leverage). To explain this indices leverage concept we shall use the stock indices trading example above:

If your indices broker has given you 100:1 Maximum Indices Trading Leverage, but you only open a trade of 10,000 dollars then Used Indices Leverage is:

10,000 dollars: 1,000 dollars (your money)

10:1

Your have used 10:1 Leverage, but your maximum is still 100:1 Leverage. This means that even if you're given 100:1 Maximum Indices Leverage or 400:1 Maximum Indices Trading Leverage, you do not have to use all of it. It is best to keep your used indices leverage to a maximum of 10:1 but you will still select 100:1 maximum indices leverage option for your trading account. The extra indices leverage will give you what we call Free Indices Trading Margin, As long as you have some Free margin on your indices trading account then your trades will not get closed by your indices broker because this margin requirement will remain above the required level.

When it comes to trading indices one of your rules: money management rules on your trading plan should be to use indices leverage below 5:1.

In the above image examples, the trader is using $2683.07, total controlled amount is $268,307, but account equity is $16,116.55, therefore used index leverage is ( $268,307 divide by 16,116.55 ) = 16.64 : 1

16.64 : 1 Used Leverage

Indices Margin accounts allows traders to control a large amount of currency using little of their own while borrowing the rest

Obtaining this indices account will enable you to borrow money from the broker to trade indices lots with.

The amount of borrowing power your account gives you what is called 'leverage', and is usually expressed as a ratio - a ratio of 100:1 trading leverage means you can control resources worth 100 times your deposit amount.

What this means in Indices terms is that with 1% margin in your indices account you can control a trade worth $100,000 with a $1,000 deposit.

However, Trading this indices trading account increases both potential for profits as well as losses. In Indices you can never lose more than you invest, losses are limited to your deposits & usually brokers will close a trade which extends beyond your deposit amount by executing a margin call. Traders must therefore try to keep their margin level above that required. By using money management rules & keeping your used leverage below 5:1.