What is Margin

Margin or collateral is a portion of the funds in a trading account used as collateral to open a position using Leverage.
Conducting such transactions on the market is called Margin Trading.

When investors trade with margin, they are required to invest only a portion of their own funds from the total value of the transaction. The margin is “frozen” for the duration of the trading operation and is returned to the account after it is closed. Margin funds for a transaction are a guarantee to the broker that the trader will fulfill his financial obligations if the transaction leads to a negative result.

The size of the margin directly depends on the amount of leverage used and is recalculated each time the trader opens a new position. Its size is calculated using the following formula:

Margin = Position Volume (lot) * Contract Size / Leverage

Let's look at an example:

Let's say the leverage of the selected broker is 1:10. Therefore, for every 10 units of currency in the transaction, 1 unit of margin currency is needed. That is, with a desired position volume of $10, the margin will be $1. For this example, it is equal to the ratio 1:10 or 10%.

The higher the leverage used, the less collateral is required for the transaction. However, it is worth considering that opening transactions with high leverage and large volume increases not only potential profit, but also potential risks. If the free funds in the account (not used as collateral) equal the level of margin for the transaction, the broker will send you a warning - Margin call, that the free funds in the account are becoming critically low to maintain positions on the market.

If the negative dynamics continue, your positions may be forced to close by Stop out. Please note that brokers may have different margin requirements and stop out levels and you should carefully study them in the Trading conditions before opening transactions on the market!