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THE CONCEPT OF LEVERAGE

What is Leverage?

Leverage allows traders to borrow money and use it to invest in the foreign exchange market. Due
to the availability of leverage, clients are able to make large investments without needing huge
amounts of capital. In other markets, such as the equities market, clients would have to pay 50% of
the full amount for each share of stock they were investing in. Most market makers allow positions
to be leveraged up to 100:1. This means that if a trader wanted to Ask “Lot” worth $100,000, with

100:1 leverage the trader only has to put up $1,000. A broker offers leverage up to 200:1 and more.
Leverage multiplies all aspects of a trade including both profitability and risk.

Increasing your leverage increases the opportunity both to take bigger profits…and sometimes to
rack up bigger losses.

What is Margin?

Margin is a deposit that guarantees your trading losses. The margin requirement allows traders to
hold a position much larger than the account value. In the event that funds in the account fall below
the margin requirements, your broker will close some or all open positions. This prevents clients
account from falling into a negative balance, even in a highly volatile, fast moving market.

How are Leverage and Margin Related?

Leverage and margin are related in the way mentioned above – the amount of leverage a market
maker gives to a client defines the amount of margin that the client will have to commit in order to
take a position in the market. For example, when leverage is 100:1, the “1” in the leverage ratio
signifies the amount of capital the customer has invested of his own money, which is also known as
the margin.