Saving & investing
Trading margin and leverage: Definition, Formula and Example
Trading margin is collateral or account equity supporting a leveraged position; it is different from a business’s gross profit margin.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Margin account equity; Leveraged exposure.
How it works
Borrowing to buy securities increases exposure relative to investor equity. Price changes, financing charges and maintenance requirements affect the remaining equity. Broker liquidation can occur under account rules. Forex and derivatives margin arrangements have their own conventions and risks.
Simplified long-position equity = market value − loan; exposure-to-equity leverage = market value / equity
This balance-sheet illustration excludes interest and costs. A regulatory or broker margin requirement is not a forecast of maximum possible loss.
$10,000 of securities funded with $5,000 equity
Assume the remaining $5,000 is borrowed and the position falls 10%.
- New market value: $10,000 × 0.90 = $9,000.
- Remaining equity: $9,000 − $5,000 = $4,000.
- Equity loss: ($4,000 − $5,000)/$5,000 = −20%.
A 10% position loss produces a 20% equity loss in this simplified two-times exposure.
Long position, unchanged debt, no interest, fees or broker liquidation during the price move.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
Margin can magnify losses beyond the original cash contribution
A larger decline and forced sale can leave a debt after the position is closed. Do not apply product-pricing margin formulas to a trading account or infer broker approval from a calculator result.
Explore with a calculator
- Margin Calculator
Select the Stock or Forex task for collateral calculations; Business profit is a different task.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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