Margin and Leverage Explained for Beginners

Understanding Margin

Margin is the amount of your own money that you deposit with your broker or exchange in order to open a trade. You can think of it as a security deposit. Instead of paying for the full value of the trade upfront, you put in a small percentage, and your broker allows you to control the rest.

For example, if a broker requires a 5% margin for a $10,000 trade, you only need to deposit $500. The broker essentially lets you control the remaining $9,500. This percentage requirement is called the margin requirement, and it is usually set by the broker.

Understanding Leverage

Leverage is the ability to control a much larger trade size using borrowed money from your broker.

It is usually expressed as a ratio such as 10:1 (10x) or 100:1 (100x). If you have $1,000 and use 10x leverage, you can control $10,000 worth of an asset.

Margin is the money you put in for the trade, while leverage is the money your broker lends you to increase your buying power.

Any profit you make using leveraged money is yours to keep, but if the trade goes against you, the loss comes out of your margin.

Profit and loss are calculated on the total size of your trade, not just your margin. This means a highly leveraged position can wipe out your margin very quickly if the market moves in the wrong direction.

How Margin and Leverage Are Connected?

Margin and leverage are directly linked:

Notional Value = Margin × Leverage

If you know the margin percentage, you can calculate the leverage by dividing one by the margin percentage.

For example, if the margin requirement is 1%, the leverage will be 1 ÷ 1% = 100x. Similarly, if the margin requirement is 5%, the leverage will be 1 ÷ 5% = 20x.

In practice, brokers usually set the margin requirement first. That margin percentage automatically determines the maximum leverage you can use.

If you have limited funds, you would look for a broker with a lower margin requirement, which results in higher leverage.

Bitcoin Example – Price $100,000 with 100x Leverage

Imagine Bitcoin is trading at $100,000 and you want to trade one full Bitcoin. If your broker’s margin requirement is 1%, you can calculate the margin needed.

That would be $100,000 ÷ 100 = $1,000.

This means with just $1,000 of your own money, you can control a $100,000 Bitcoin position using 100x leverage.

If the price of Bitcoin rises by 1% ($1,000), your profit will also be $1,000, which is a 100% gain on your margin. But if the price falls by 1%, you lose $1,000 and your margin is completely wiped out.

This is why high leverage is extremely risky — even a small move against you can lead to liquidation.

Reference Table

Benefits and Risks

Using margin and leverage allows you to trade larger positions with a smaller amount of money, which can lead to significant profits even with small market movements.

However, the same principle works in reverse. Losses are also magnified, and a highly leveraged trade can be wiped out by even a small unfavorable price move.

This is especially true in volatile markets like cryptocurrencies, where prices can swing by several percent in a matter of minutes.

This article is for informational purposes only and should not be considered financial advice. Investing in stocks, cryptocurrencies, or other assets involves risks, including the potential loss of principal. Always conduct your own research or consult a qualified financial advisor before making investment decisions. The author and publisher are not responsible for any financial losses incurred from actions based on this article. While efforts have been made to ensure accuracy, economic data and market conditions can change rapidly. The author and publisher do not guarantee the completeness or accuracy of the information and are not liable for any errors or omissions. Always verify data with primary sources before making decisions.