Margin is a way for investors to increase their purchasing power. Despite its ability to make more money, it also comes with a higher level of risk.

You might also be wondering, "What does leverage in trading mean?" Both words are often used to imply the same thing. Both terms refer to ways that you can open a trading position with a broker, using a small amount of capital to take up a large position.

When these terms are used, they can be hard to understand for new investors and those who aren't seasoned traders. With this guide, you should soon have a much better understanding of them.

When you trade with leverage, you can take on a large position without having to pay the full cost at the start. Say you wanted to open a position that was the same as buying 100 Netflix shares. With a regular trade, that would mean paying for the 100 shares in full right away. With a contract for difference, you might only have to pay 15% of the cost upfront.

You can spread your capital further by utilising leverage, but it's important to remember that your profit or loss will still be based on the full size of your position. In our example, that would be the difference between the price of 100 Netflix shares from when you opened the trade, to the point when the trade closed. This means that both profits and losses can be much bigger than what you initially put in. Because of this, it's important to keep an eye on the leverage ratio and make sure you're not trading more than you can afford.

When you trade with leverage, you open a position with money you borrowed from the broker. As part of their investment strategy, traders may want to use leverage to get more exposure with less money on hand. Leverage is used in multiples of the trader's capital, such as 2x, 5x, or more. Leverage can be used both to buy (go long) and to sell (go short). It's important to remember that both profits and losses will be multiplied.

We said above that the words "leverage" and "margin" are often used the same way. This is true, but we should add that the two terms do have slightly different meanings.

Margin is how much of your account's equity you use to open a position. When it comes to leveraged positions, margin is often given as a percentage of the position's market exposure.

For example, if you put R500 into a trade and the leverage is 7x, your risk is R3,500. R500 or 14,3%, is the margin.

Margin is the amount of money you need to open a position and leverage is the number of times your exposure is multiplied.

If you want to work out the margin, calculate how big your position will be and divide that number by the higher number, in the leverage ratio.

For this example, we have a trader, let’s call her Jane.

Jane wants to trade R35,000 with 7:1 leverage.

So, the margin formula would be: R35,000 divided by 7 = R5,000.

If the leverage was 5:1, Jane would have to put down R7,000 to manage the same size position. In this case, the formula would be R35,000 / 5 = R7,000.

Basically, this means that you would work out the margin the following way:

Size of position/ the larger number in the ratio = the margin.

When you buy on margin, the size of your deposit will depend on how much leverage the broker gives you and what the trading terms are. The term for this payment is "initial margin." Margin requirements can be very different based on things like the type of asset, the market, and the amount of risk involved.

When you buy on margin, you borrow money from a broker to buy securities.

You can borrow money against the value of certain investments in your portfolio, just like you can borrow money against the value of your home. This is called margin lending and it happens in a margin account, which is a type of account you can get at a brokerage.

With a margin account, you can borrow money from the brokerage to buy securities that cost more than the money you have on hand. In this case, the cash or securities you already have in your account serve as your collateral.

Margin accounts are generally considered best for experienced investors since trading on margin means taking on additional costs and risks.

A margin call is made when your account equity falls below your margin requirement (thereby creating a negative available margin balance). When you get a margin call, you will have a certain amount of time to respond and fix the problem. This can be done by either putting in more cash or selling securities. In extreme situations, securities could be sold before the deadline.

Using margin increases your purchasing power as you have an increased amount of capital available to purchase securities. This can amply profits.

If you primarily enter into margin trading to amplify gains, then you must be aware that margin trading may also amplify losses. Should the value of the instruments bought on margin rapidly decline in value, you may owe not only the initial equity investment but also an additional amount. Margin trading also comes at a cost; brokers often charge interest expense, and these fees are assessed regardless of how well (or poorly) your margin account is performing.

Because there are margin and equity requirements, investors may face a margin call. This is a requirement from the broker to deposit additional funds into their margin account due to the decrease in equity value of securities being held. Investors must be mindful of having this additional capital on hand to satisfy the margin call.

Should investors not be able to contribute additional equity, or if the value of an account drops so fast and breaches certain margin requirements, a forced liquidation may occur. This forced liquidation will sell the securities purchased on margin and may result in losses to satisfy the broker requirement.

The amount you can borrow depends on a variety of factors, including overall account balance, current equity, and the specific securities held in your account. To view the specific figure, navigate to the “Available to Invest” section of your margin account which is displayed at the bottom of the page when viewing an instrument.

You will need to select your “ZAR Margin Account” or “USD Margin Account” to trade with margin. If you don’t have a margin account, select “add an account” on the account page. You will need to pass the suitability questionnaire in order to open a margin account.

You can only trade with margin through your ZAR or USD margin account, if you wish to stop trading with margin just trade with your standard ZAR and USD account.