Understanding Leverage and Margin
Learn how to increase your trading volume with leverage and maintain a cash margin to cover your open trades.
Understanding How Leverage Works
In the simplest of terms, leverage boosts the amount you can trade with.
Let’s view this example of how leverage works.
You deposit $1,000, which means your equity is $1,000. Here at Absolut Ability, we give you a small amount of leverage, just 1:50. This means that you have 50 times the amount of your equity to trade with. Here’s the formula:
$1,000 x 50 = $50,000.
The required securities amount, also known as “Margin Deposit” is automatically displayed on each pop-up trade screen within your Absolut Ability trading platform.
Traders use leverage to multiply gains. Thing is, leverage can also multiply losses. It’s a two-edge sword, so be careful how you use it.
Please note that margin requirements usually increase proportionately with the value of the underlying trade asset.
What is a Margin Call and When do You Receive a Margin Call?
Your margin is always being monitored, and it’s being monitored in real-time. Why? Because if you know what your margin requirements are, you know where you stand at all times.
Let’s talk about Maintenance Margin. Your maintenance margin is the minimum amount of equity you need to maintain an open trading position. Now, should your equity fall below the minimum margin amount required, Absolut Ability will automatically execute a margin call, which will close any open positions till your account equity rises to the levels in which your trades can open again. Once your equity exceeds your maintenance margin levels, your trades will remain closed.
An example of a Margin Call
Let’s say you opened a Absolut Ability trading account and deposited $10,000 via your credit card.
Your equity now stands at $10,000. Why? Here’s the formula:
Deposits – Withdrawals + P&L of all opened positions.
Your available balance stands at $10,000 too because of the following formula:
Balance + P&L of all open positions – Initial margins
Your P&L stands at $0. This is due to the total profit and loss of all your open positions, which include your daily premiums. Right now, you’ve only just launched your account and made a deposit. You have no open positions and no premiums have been incurred.
At 10.20 am, you buy 200 Google Share CFDs at $540.00
The total amount you purchased is 200 x $540.
Let’s break that down. You purchased 200 share CFDs at $540 each. This works out to $108,000.
The initial margin that’s needed for purchasing 200 Google share CFDs is 2%, which means you need to have $2,160 in available margin.
The maintenance margin needed to keep your position of 200 Google share CFDs is 1%, which equals to $1,080.
Now, if your equity drops below $1,080, you’ll receive a margin call and the Absolut Ability trading platform will automatically liquidate all your open positions.
Your equity at this point is $10,000 as this is how much you deposited, and the formula is $10,000 + $0.
Your available balance after you purchased the 200 Google share CFDs is $7,840. Why? Here’s the formula:
$10,000 – 2% x $108,000.
Your P&L stands at $0.
At 1 pm, the Google share price sinks to $510. You purchased the Google share CFDs at $540 each.
Your equity now stands at $4,000. Here’s the formula:
-$6,000 + $10,000
Your available balance is $1,840. Here’s why:
$10,000 is the amount you deposited – 2% margin x $108,000 + 200 shares you purchased x ($510 – $540, the amount you bought each Google share CFD at.
Your P&L now stands at -$6,000 due to this formula:
200 shares x $540, which is the price you bought each share at – 200 x $510 which is the current Google share CFD price.
At 1.15 pm, the Google share price falls even further to $495 per share. You receive a margin call and the Absolut Ability trading platform liquidates your position.
Your equity now stands at $1,000, and here’s why:
-$9,000 + $10,000.
Your available balance is $0. Why?
$10,000 – 2% x $118,000 + 200 x (the new Google share price, which is $495 – 200 shares x $540.
Your P&L stands at -$9,000 and this is due to this formula:
200 shares at $495 – 200 shares x $540, the original share price you purchased each share CFD at.
So, you received the margin call because your equity is now at $1,000 and you need a minimum of $1,080 to maintain the open position on your purchase of 200 Google share CFDs. Absolut Ability liquidates your position and your current balance is now:
Your equity stands at $1,000
Your available balance is $1,000 (deposits – Withdrawals + P&L of your closed positions.
Your P&L is at $0 as you have no open positions.
What is Initial Margin?
When you open any trading position at Absolut Ability, your available trading account equity must exceed your trades initial margin level requirement. Please note that margin levels vary depending on different instruments you want to trade.
You can view your required margin total within the My Account bar, which is situated on the left side of the Absolut Ability trading platform page. You also need to take note that your initial margin is being monitored in real-time at all times.
Your Maintenance Margin Level
To keep any positions open at Absolut Ability, the equity in your trading account must exceed the total maintenance margin level. Never forget this as this is extremely important! Maintenance margin level requirements are also specific to each individual instrument you trade and Absolut Ability displays the maintenance margin level for each instrument.
You can view your maintenance margin level under the My Account bar, which you can find on the left side of the Main page on the trading platform. Your maintenance margin level is being continuously monitored in real-time too.
Important Trading Safety Measures
For your own safety, it’s important to note that if additional margin isn’t provided, Absolut Ability will automatically close out all your open positions. We do this to protect your investment. Never forget that the higher the leverage, the higher the risk of losing your deposited capital. Leverage can work both for and against you, so remember to take note of this and speak with your Absolut Ability Account Manager if you’re not entirely sure how to calculate your margin levels.
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