CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 

27.2% of retail investor accounts lose money when trading CFDs with this provider.

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Education divider Leverage and Margin

Leverage and Margin

Many people often get confused when discussing margin and leverage, even though the two are closely related. Margin refers to the borrowed money used to invest in financial assets, while leverage is the act of using debt to increase potential returns. Understanding this difference is crucial for traders, as both concepts play a significant role in financial markets.

What is Leverage?

Leverage is when borrowed capital is used to amplify the potential gains (or losses) of an investment. Leverage allows traders to control larger positions with less capital. However, it increases risk, as a leveraged trade can magnify losses as well as profits. Proper risk management is crucial when trading with leverage to avoid significant financial losses.

What is Margin?

Margin is the money borrowed from a broker to increase a trader’s buying power. With margin, a trader only needs to invest a small portion of their own money (initial margin) to open a position, sometimes as little as 1% of the trade's total value. While margin trading can enhance profits, it also increases the risk of losing the entire account value on a single trade. Professional traders may even face the possibility of losing more than the account's value, requiring additional funds to cover losses.

The amount of margin required varies depending on the broker and the type of asset being traded. Forex trading typically offers greater margin opportunities compared to equity trading.

Advantages of Using Leverage and Margin

  • Increased Potential Returns – The primary benefit of using margin is the ability to significantly increase profits on successful trades.
  • Lower Interest Rates – Margin trading usually offers competitive interest rates compared to borrowing from other sources.
  • Avoid Cash Account Violations – Using margin helps traders avoid issues like unsettled funds in cash accounts, which can lead to violations and account restrictions.
  • Trading Flexibility – With leverage, traders can open positions with less capital, allowing them to seize more market opportunities.
  • Diversification – Margin allows traders to open multiple positions, diversifying their portfolios and reducing concentration risks.
  • Easier Financing Option – Once approved for margin, traders can access funds without additional paperwork or fees.

Disadvantages of Margin and Leverage

  • Leverage Risk – While leverage can increase returns, it can also magnify losses, leading to significant financial damage.
  • Margin Call Risk – If a trader’s account equity drops below a certain percentage, they will receive a margin call, requiring additional deposits. Failure to meet a margin call can result in the broker closing positions, often leading to further losses.