In context, leverage and margin refer to the same thing. When a trader opens a position larger than the amount of funds required to open it, the trader has put down margin to receive leverage.
While margin refers to the amount of funds a trader has put down as collateral (this margin will be called a ‘good faith deposit’)
Leverage refers to the amount of money he controls relative to the margin (the larger position is often referred to as the ‘notional’ value).
For example, suppose a trader puts down $1,000 as a margin in order to control $100,000. In this case, the trader’s leverage would be 100:1 because the trader controls one-hundred times what he put down. Likewise, his level of margin would be 1% because only 1% was required to open the larger position.
|Margin Required |||Position Size – Notional Value |||Leverage |||Margin %|
In a more extreme case, if a trader puts down $500 in order to control $100,000, his leverage would be 200:1 while his margin percentage would be 0.5%.
Margin – The Double Edged Sword
Although high leverage allows a trader to open very large positions, magnifying their exposure to the market – such margin may also be risky, magnifying potential losses.