Forex · 2 MIN READ
Leverage & margin: understand the exposure
The difference between a deposit and a position, with a clear example of amplified losses.
Leverage allows an exposure larger than the capital set aside to support it. Margin is that required capital. The two terms describe related parts of an arrangement, but neither changes the underlying size of the market exposure.
A hypothetical example
Suppose a position has an exposure of 10,000 units and requires 1,000 units of margin. That represents leverage of 10 to 1. Ignoring costs and currency conversion, a 1% adverse move would produce a loss of 100 units: 10% of the margin. A favourable move would also be amplified relative to that margin. This is an illustration, not a suggested trade.
Margin is not a maximum-loss promise
If losses reduce account equity, a provider may require additional margin or close positions. Fast price changes can affect the execution of that close. Whether losses can exceed the deposit depends on the product, provider and applicable protections; it should never be inferred from the word margin alone.
Read the actual terms
Different instruments and jurisdictions can have different requirements. Understanding the exposure, financing charges and close-out rules matters more than focusing on a headline leverage ratio. Higher leverage magnifies the effect of ordinary price changes on the supporting capital.
These concepts explain a financial mechanism. They do not establish that using leverage is appropriate for a particular person or situation.
Further reading
CFTC — Things to know about forex
Investor.gov — Foreign exchange and leverage
