Margin: Is the money that will be placed and engaged in the positions that you take. For example to buy $1000 with the leverage of 100:1, $10 from your account will be engaged in the position ($1000 / 100 = $10). You can not use this $10 to take any other positions, as long as the position is still open. If you close the position, the $10 margin will be released.
Leverage:
Leverage is a facility offered by the broker, to help the trader to trade larger amounts of securities by having a smaller account balance. For example, when your account leverage is 100:1, you can buy $100 by paying $1. Therefore, to buy $100,000 (one lot), you should pay only $1000 (this is just an example. I know nobody pays dollar to buy dollar
)Now you tell me please. How much you have to pay to buy 10 lots USD with an account that its leverage is 50:1 ?
That is right. You have to pay $20,000 to buy 10 lots or $1,000,000 USD.
Leverage was so easy to understand, right? I had to explain it first, to become able to talk about the other term which is margin.
Margin:
Margin is calculated based on the leverage, but to understand the margin, lets forget about the leverage for now and assume that your account is not leveraged or indeed its leverage is 1:1
Margin is the amount of the money that participates in a position or trade. Lets say you have a $10,000 account and you want to buy €1,000 against USD. How much US dollars you have to pay to buy €1,000?
EUR/USD rate is currently 1.4314. It means each Euro equals $1.4314. Therefore, to buy €1,000, you have to pay $1,431.40:
€1,000 = 1000 x $1.4314
Therefore:
€1,000 = $1,431.4
If you take a 1000 EURUSD long position, $1,431.4 from your $10,000 account has to participate in this position. When you set the volume to 0.01 lot (1000 unit) and then you click on the buy button, $1,431.4 from your account will be paid to buy 1000 Euro against USD. This $1,431.4 is called margin. Now, if you close your EURUSD position, this $1,431.4 will be released and will be back to your account balance.
Now lets assume that your account is leveraged and it has a 100:1 leverage. To buy 1000 Euro against USD, you have to pay 1/100 or 0.01 of the money that you had to pay when your account was not leveraged. Therefore, to buy 1000 Euro against USD, you have to pay $14.31.
Now please tell me that if you take a one lot EURUSD with an account with the leverage of 100:1, how much margin will participate in the trade?
One lot EURUSD = 100,000 Euro against USD
EURUSD rate: 1.4314
100,000 x 1.4314 = 143,140.00
Therefore:
One lot EUR =$143,140.00
Leverage: 100:1
Margin = $143,140.00 / 100 = $1,431.40
Therefore, to have a one lot EURUSD position with a 100:1 account, $1,431.40 margin is needed.
