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This external capital is borrowed from the broker or provides this for the trader, who must deposit a security deposit (margin). The trader can therefore trade more capital on the financial markets than he actually owns. Higher profits and losses are thus possible. Leverage is applied to the margin deposit and multiplies it up. There is a wide range of leverage products, which I will also introduce to you in the following texts.

Facts about trading with leverage products: 

•     The margin is called security deposit
•     The margin is deposited with the broker
•     The security deposit is multiplied by the leverage
•     The broker basically lends the trader money for a larger position
•     The leverage can increase the possible profit and loss

How does margin trading work? - Example:

In the following I would like to show you an example of margin trading. The trader has an account balance of 10,000€. Now the trader wants to trade shares with a leverage. The broker offers him CFDs (contracts for difference) with a leverage of 1:5 for shares with Exness deposit method. In theory, the trader could now buy shares worth 5 x 10,000€ = 50,000€ or sell them short. However, in my opinion, this makes little sense, because the entire account would be debited and the risk would be much too high.

The trader decides to buy the share BMW at a price of 100€ and immediately 200 pieces of it. The total amount of the position is now 20.000€. Thanks to the leverage product only a security deposit of 4.000€ is necessary. So with a trading account of 10.000€ 20.000€ of shares are traded and for this only a margin of 4.000€ is needed.

The share rises in one week directly by 10€ to the price of 110€ and the trader wants to sell the position. The profit is now 2.000 x 10€ = 2.000€. Thanks to the leverage the trader could book a profit of 20% on his account. Without the leverage product, the profit would be a maximum of 1,000€, because the trader could only buy shares for 10,000€.

What is a margin call?

A margin call is the worst scenario that can happen to a trader on the stock market. It means that losses occur and the trader's account becomes smaller. Positions are still open in the market and the trader does not have enough margin to cover the positions.

Now an automatic mechanism of the broker takes effect and the positions are automatically stopped out. It can vary from broker to broker at what level you are stopped out. Some brokers even allow you to overstretch the margin a little bit. In summary, a margin call in most cases means the burial of one's account balance, because the positions are too high.

How are margin and leverage related?

This topic has actually already been touched on above, but I would like to clarify this again. The trading leverage multiplies your margin and the result is the position size. The trader can always influence the margin size through the position size or the position size through the margin/leverage.

Depending on the broker, there are two different methods for opening positions:

Position sizing with margin (directly with margin):

The trader enters the amount of margin, then selects the leverage and then the position size is obtained.

Position sizing by volume (indirectly with margin):

The trader selects the position size directly. In the back of his mind he must keep in mind how much margin he needs for it.

A high leverage means you can trade larger positions. However, the leverage does not have to be fully utilized. With a leverage of 1:500 you don't have to use it completely. In the end, the position size determines the margin and risk exposure.