| Updated: October 23, 2025What is leverage? What is a margin?
This lesson will cover the following:
- The concept of leverage
- Characteristics of margin
What is leverage? What is a margin?
When it comes to Forex trading, one should take into consideration two extremely vital concepts – leverage and margin. This is because, if they are not used appropriately, these concepts can easily cause concern. The terms “leverage” and “margin” relate to the same concept, although they are applied in different contexts.
What is leverage?
When we refer to leverage, we usually mean the use of borrowed capital to increase the potential return on an investment we intend to make. It can benefit both the investor and the firm in which they invest or operate. It is worth noting, however, that leverage is always associated with a higher level of risk. If an investor relies on leverage and the investment moves against them, their losses may be far greater than they would have been had the investment not been leveraged. Therefore, leverage amplifies both profits and losses.
Leverage is usually expressed as a ratio, for instance 1:100 or 1:500. This ratio means that for every $1 the investor deposits into their account, they can enter trades worth $100 or $500. Thanks to leverage, investors do not need to hold thousands of US dollars to trade in a market where, only a few years ago, only large corporations or institutions could afford to participate.
In Forex, extremely high levels of leverage are common, as trading takes place in the market with the largest daily volume of all financial markets. Brokers allow their clients to use high levels of leverage because the market’s liquidity makes it relatively easy to enter and exit a trade. Because liquidity is so high, traders can manage their losing positions much more easily.
Currency trading is usually conducted in ‘contracts’ for a standard quantity of units called lots. Each lot is worth 100,000 units of a particular currency. If a trader uses the US dollar as the base currency and enters a position of one standard lot, they are buying or selling 100,000 units of that currency.
- Trade Forex
- Trade Crypto
- Trade Stocks
- Regulation: NFA
- Leverage: Day Margin
- Min Deposit: $100
Example
In Forex, if a trader has $1,000 while controlling an entire $100,000 standard lot, their leverage is 1:100. The trader can make deals totalling $100,000 while owning only $1,000 of it.
Now, let us imagine that the trader actually had the full $100,000 in their account and it increased in value by $1,000. The trader has now expanded their bankroll by 1%. That is known as 1:1 leverage. In Forex this is rarely the case, as leverage exists so that traders do not need to hold large amounts of money to participate in the market. If the trader instead used leverage of 1:100, the $1,000 profit would actually have doubled their deposit. That sounds like a good deal, right?
However, there is another scenario. Let us imagine that, instead of increasing by $1,000, the trader’s account decreases by $1,000. Using higher levels of leverage increases one’s purchasing power but also one’s exposure to risk. That is why, in the Forex industry, leverage is often referred to as a double-edged sword.
What is a margin?
If a trader wishes to enter trades using borrowed money, they will need to make a deposit that represents a certain proportion of the trade’s actual value. This deposit is called the margin requirement, or a good-faith deposit. In most cases investors will be able to withdraw the entire amount of the deposit if they decide to close the trade.
Another crucial aspect of margin trading is the so-called margin call. If the strategy a trader follows does not work and the trader starts to lose money, they may eventually reach the point where a portion of the deposit is lost. A margin call occurs when their margin falls below 50% (below the obligatory maintenance margin). If a margin call occurs, the broker requires the customer to deposit additional funds so that the account is restored to or above the minimum maintenance margin, allowing the client to continue trading. This serves as insurance for the broker that the trader will ultimately repay their debt.
Let us look again at the example provided earlier. In Forex, a trader may enter trades of up to $100,000 with only $1,000 set aside. The leverage in this case is 1:100. The $1,000 that the trader deposits into their account is considered the initial margin. This is what the trader has to commit in order to participate in the market.
Remember, your margin is the money you give your broker as a good-faith deposit. The broker requires these margins from everyone and pools them to make large trades on the inter-bank network. The actual profit or loss you register in the market depends on the size of the trade you enter, not on the amount of margin required.