Margin and leverage: how exposure changes

The essentials

Margin is collateral required to support an exposure. Leverage relates that exposure to required margin. Small collateral does not limit losses to that amount or turn a large position into a low-risk trade.

Understand the mechanism, not just the definition

Margin is collateral linked to exposure; it does not determine the amount you can lose. Higher available leverage reduces required margin for the same position without reducing its price sensitivity. Liquidation also depends on equity, used margin and contractual thresholds. Free margin is not a loss budget.

Example and verification

Simplified example without costs: USD 10,000 exposure at 1:20 requires USD 500 margin. An adverse 1% move is USD 100 on that exposure, or 20% of the margin. Actual rules may include tiers and conversions.

Worked case, step by step

For hypothetical USD 10,000 exposure, a simplified 1:100 formula requires USD 100 margin; 1:200 requires USD 50. A 1% adverse move in a linear product produces −USD 100 gross in either case. Instruments with their own formulas require the contractual margin calculation.

What to verify when applying this

Check the entity's margin formula, forced-close level and negative-balance protection. Do not compare brokers only by advertised maximum leverage. Use our calculator to understand arithmetic, not to establish a recommended account balance.

Practice: verify it in your environment

Learn by observing the process and keeping its data. Complete this practice in demo or using documentation, without sending real orders or adding capital for the exercise. Record differences between the example and your account specifications.

1. Calculate exposure and sensitivity before margin and margin level.
2. In demo, observe what changes when volume changes at the same reference price.

Test your understanding

Try the question before revealing the answer. Justify the conclusion and its assumptions rather than memorizing a number.