Margin Trading: What Investors Need to Know Before Using Leverage

MEVSandwichMaker · 2025-12-26T09:44:21+00:00

Margin, or financial leverage, is a powerful yet risky tool for investors. It allows them to borrow from trading platforms to enhance their trading capacity. However, understanding its mechanics and risk factors is crucial for effective usage.

MEVSandwichMaker

2025-12-26 09:44:21

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Margin is a powerful tool but also very “dangerous” if you do not understand how it works. Let’s explore everything about leverage and when you should - or should not - use it.

What is (Financial Leverage)?

Margin, also known as “financial leverage,” is a form of borrowing from trading service providers to help investors expand their trading capacity. Instead of only using their own capital, you can borrow additional funds from the exchange to open larger positions.

The mechanism is very simple: you deposit a certain amount into your (“initial margin”) account, then the exchange lends you extra so you can trade with a higher total value. Margin can be applied to stocks, foreign exchange (Forex), derivatives, cryptocurrencies, and other financial assets.

Real-world example: With $1,000 in your account and a leverage of 1:100, you can trade assets worth $100,000. This means your profits will be multiplied 100 times, but losses as well.

Understanding margin ratios and how to calculate

Each trading product has different margin ratios, from 1:1 (no leverage) to 1:200 or higher. This ratio determines your ability to expand your trades.

Initial margin calculation formula:

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