How Leverage Works in Trading and Buying on Margin

Leverage in trading lets you control a large position with a small deposit, because your broker sets aside part of your funds as collateral and gives that money greater market exposure. The deposit is called margin. Leverage is the ratio of your position size to your margin. The two words are linked, but not the same, and confusing them is one of the most common and costly beginner mistakes.

This guide explains how leverage works, how buying on margin fits in, and what the mechanics look like on a real trade. It uses figures from EBC Financial Group’s own product range so the math is concrete rather than abstract. It also shows, with numbers, why leverage increases losses at the same speed it increases gains.

Key takeaways

• Leverage is a ratio (for example 100:1 or 500:1). Margin is the deposit that ratio requires. Leverage is the effect; margin is the money.

• Profit and loss are calculated on the full position size, not on your margin. A small price move can be large relative to your deposit.

• Leverage caps differ sharply by region. The EU, UK, and Australia cap retail forex leverage at 30:1, while many markets in Asia, the Middle East, Africa, and Latin America do not.

• A margin call and an automatic close-out happen when your equity falls too far. Negative balance protection stops a retail account from going below zero at some regulated brokers.

• Higher leverage does not increase your profit target. It only lowers the deposit and raises the risk of a fast loss.

What is leverage in trading?

Leverage is the use of borrowed exposure to open a position larger than your cash alone would allow. You put up a fraction of the trade value. Your broker provides the remaining exposure. The position then moves in full, as if you had funded it entirely.

Leverage is written as a ratio. With 100:1 leverage, every 1 unit of your money supports 100 units of position size. With 500:1, every 1 unit supports 500. The higher the ratio, the smaller the deposit needed for the same position.

This matters in forex because currency prices move in small increments. A major pair may move less than 1 per cent in a normal day. Leverage is what turns those small percentage moves into meaningful gains or losses on a modest account.

What is margin, and how is it different from leverage?

Margin is the amount of your own money the broker locks to open and hold a position. It is not a fee, and in the forex model it is not a loan you repay with interest. It is a good-faith deposit held as collateral while your trade is open. When you close the trade, the margin is released back to your balance, adjusted for your profit or loss.

Leverage and margin are two views of the same relationship. Leverage is the ratio. Margin is the cash that ratio produces. A 500:1 leverage ratio is equivalent to a 0.2 per cent margin requirement. A 100:1 ratio is a 1 per cent margin requirement. A 20:1 ratio is a 5 per cent margin requirement. As leverage rises, the margin percentage falls.

Four margin terms describe the state of your account:

• Initial margin, sometimes called required margin: the deposit needed to open a position.

• Used margin: the total locked across all your open positions.

• Free margin: your equity minus used margin. This is what remains to absorb losses or open new trades.

• Margin level: equity divided by used margin, shown as a percentage. Brokers use this figure to trigger warnings and close-outs.

You can read a fuller breakdown in EBC’s guide to margin as a deposit rather than a cost and the difference between free margin and used margin.

How does leverage work on a real trade?

Here is a worked example using EBC’s actual forex figures. On EBC, a standard lot for a major pair such as EUR/USD is 100,000 units of the base currency; the minimum lot is 0.01; and the maximum leverage on forex majors is 500:1.

Assume EUR/USD is trading at 1.1000 and you open one standard lot (1.00 lot).

• Position size: 100,000 euros.

• Notional value in US dollars: 100,000 × 1.1000 = 110,000 US dollars.

• Required margin at 500:1: 100,000 ÷ 500 = 200 euros, which is about 220 US dollars at 1.1000.

So a deposit of roughly 220 US dollars controls a position worth 110,000 US dollars. That is the mechanics of leverage.

Now watch what a price move does. For EUR/USD, one pip is 0.0001, and one pip on a standard lot is worth about 10 US dollars. EBC’s guide to calculatingpips explains this value in detail.

• If EUR/USD rises 50 pips to 1.1050, your gain is 50 × 10 = 500 US dollars. Against a 220 US dollar margin, that is a gain of more than 225 per cent on the deposit.

• If EUR/USD falls 50 pips to 1.0950, your loss is 500 US dollars. That loss is more than twice the margin you posted.

This is the point that matters most. The 500 US dollar result, up or down, is calculated on the full 110,000 US dollar position, not on your 220 US dollar deposit. Leverage did not change your profit target. It changed how little you had to deposit, and therefore how large the outcome is compared with your own money.

Buying on margin: the same idea, a different market

“Buying on margin” is a term that comes from stock investing. It means buying shares with a mix of your own cash and money borrowed from your broker, with the shares as collateral. In US equities, the Federal Reserve Board’s Regulation T sets a 50 per cent initial-margin requirement, so a broker can lend up to 50 per cent of the purchase price of a margin equity security. That means 10,000 US dollars of your cash can buy 20,000 US dollars of stock, and you pay interest on the borrowed half.

Forex and CFD trading also use margin, but the structures differ in two ways. First, you do not own the underlying asset. You trade a contract that tracks its price. Second, in the forex model, margin is a collateral deposit set aside from your balance, not a cash loan charged daily interest. Holding a leveraged position overnight does involve a financing adjustment called a swap, which can be a charge or a credit depending on the interest rate difference between the two currencies. EBC explains this in its guide to forex swaps.

The shared idea is exposure funded by a small deposit. The differences are ownership, cost structure, and the size of the available leverage.

Leverage and margin by instrument at EBC

Maximum leverage is not one number. It changes by asset class, because more volatile instruments carry tighter limits. The table below uses EBC’s published contract sizes and maximum leverage.

The pattern is deliberate. A major currency pair is deep and relatively stable, so it carries the highest leverage. A single stock or an ETF can gap on earnings or news, so its leverage is far lower. EBC’s overall maximum leverage is 500:1, and lot size interacts with these figures. If you need a refresher on lots, see EBC’s explainer on standard, mini, and micro lots. You can also review conditions on the leverage and margin page.

How much leverage can you use? Rules by region

Leverage limits are set by regulators and vary widely. This is central for an international audience, because the cap that applies to you depends on where your account is regulated.

In the European Union, the European Securities and Markets Authority (ESMA) used its Article 40 MiFIR product intervention powers to set binding retail limits on CFDs from 1 August 2018. The limits range from 30:1 to 2:1 based on the volatility of the underlying asset: 30:1 for major currency pairs, 20:1 for non-major pairs, gold, and major indices, 10:1 for other commodities and minor indices, 5:1 for single shares, and 2:1 for cryptocurrencies. The United Kingdom’s Financial Conduct Authority (FCA) made the equivalent rules permanent through Policy Statement PS19/18, applying to CFDs from 1 August 2019 and keeping the 30:1-to-2:1 band. Australia’s Securities and Investments Commission (ASIC) introduced the same 30:1 headline cap for retail clients through its product intervention order on 29 March 2021 and extended it for five years in 2022. ASIC noted that before the order, retail exposure could be up to 500 times the client’s outlay.

Several markets that EBC serves take a different path. In South Africa, the Financial Sector Conduct Authority (FSCA) regulates brokers through licensing and conduct rules but does not impose a fixed retail leverage cap. In India, the Reserve Bank of India and SEBI restrict onshore retail forex to a small set of exchange-traded currency derivatives on recognised exchanges, and the RBI maintains an Alert List of unauthorised forex platforms. In Dubai, the Dubai Financial Services Authority applies retail protection rules to leveraged products, which it classifies as Restricted Speculative Investments. Where no hard cap applies, brokers may offer much higher leverage, which is why ratios such as 500:1 exist in these regions.

The higher your leverage, the less deposit you need, and the smaller the price move that can wipe out that deposit. A cap is not a restriction on skill. It is a limit on how fast an account can be lost.

Margin call and close-out: what happens when a trade moves against you

When losses reduce your equity, your free margin shrinks. If it falls far enough, two things can happen in sequence.

A margin call is a warning. It signals that your equity has dropped to levels close to the margin required to keep your positions open, and that you should add funds or reduce exposure. EBC’s guide to what triggers a margin call covers this in detail.

A close-out, or stop-out, is automatic. If your margin level continues to fall, the broker closes positions to prevent further losses. At EBC, the stop-out level is 30 per cent, meaning positions begin to close when equity falls to 30 per cent of used margin. Regulated rules often add a margin close-out standard. Under FCA Policy Statement PS19/18, firms must close out a customer’s position when their funds fall to 50 per cent of the margin needed to maintain their open positions, mirroring ESMA’s per-account 50 per cent rule.

Return to the earlier EUR/USD example. A 50-pip adverse move resulted in a 500 US-dollar loss on a 220 US-dollar margin. In practice, the position would be closed well before the full 500 US-dollar loss materialised, because the account could not support it. That is the close-out mechanism doing its job.

Negative balance protection

In fast, gapping markets, a position can sometimes move past the close-out point before it is executed. Negative balance protection addresses this. It caps a retail trader’s loss at the funds in the account, so the balance cannot go below zero and the trader does not end up owing the broker. It became a mandatory retail safeguard in the EU and UK after the Swiss franc shock of 15 January 2015, when the Swiss National Bank abandoned its 1.2000 EUR/CHF floor, and the pair fell roughly 30 per cent within minutes, leaving some traders and brokers with losses beyond their capital. Negative balance protection does not prevent losses in the account and does not apply to every account type or region. EBC’s complete guide to negative balance protection explains the boundaries.

Why leverage cuts both ways: a side-by-side comparison

Compare the same 1.00 lot EUR/USD position at two leverage levels, at a price of 1.1000.

• At 500:1, required margin is about 220 US dollars.

• At 30:1, required margin is about 3,667 US dollars (100,000 ÷ 30 = 3,333 euros).

The position is identical. The pip value is identical at about 10 US dollars per pip. A 50 pip loss is 500 US dollars in both cases. The difference is the buffer. With 3,667 US dollars committed, a 500 US dollar loss is a manageable drawdown. With 220 US dollars committed, the same 500 US dollar loss exceeds the deposit, forcing a close-out. Higher leverage did not make the trade more profitable. It made the account more fragile.

This is why market size is not the point. The forex market is enormous. The Bank for International Settlements 2025 Triennial Central Bank Survey, published on 30 September 2025, reported that trading in OTC FX markets reached 9.6 trillion US dollars per day in April 2025, up 28 per cent from 7.5 trillion three years earlier, with the US dollar on one side of 89.2 per cent of all trades. Deep liquidity makes entry and exit easy. It does not reduce the risk that leverage adds to an individual account.

Frequently asked questions

Is leverage the same as margin?

No. Leverage is the ratio between your position size and your deposit. Margin is the deposit itself. A 100:1 leverage ratio and a 1 per cent margin requirement describe the same trade. Leverage is the effect; margin is the money that produces it.

Can I lose more than I deposit with leverage?

It is possible in extreme, fast-moving markets if no protection is in place. Many regulated brokers offer negative balance protection for retail clients, which caps losses at the account balance, preventing the balance from going below zero. Check whether your account and region include this safeguard.

What leverage should a beginner use?

This guide does not recommend a specific level, because the right choice depends on your capital and risk tolerance. The mechanical fact is that lower leverage requires a larger deposit and leaves a bigger buffer before a close-out. Higher leverage does the opposite.

Why do different instruments have different maximum leverage?

Because volatility differs. A major currency pair is deep and moves in small increments, so it carries high leverage. A single stock can move sharply on news, so its leverage is much lower. On EBC, forex majors are capped at 500:1, while stocks and ETFs are capped at 5:1.

What is a margin call in simple terms?

It is a warning that your account equity has fallen close to the minimum needed to keep your trades open. You would need to add funds or close positions. If equity continues to fall, the broker automatically closes positions at the stop-out level, which is 30 per cent at EBC.

Does higher leverage mean higher profit?

No. Profit and loss are calculated on the full position size regardless of your leverage. Higher leverage lowers the deposit you must post and raises the risk of a fast loss. It does not change the profit a given price move produces.

Conclusion

Leverage is often described as powerful, but the more useful word is sensitive. A leveraged account reacts to price with far more force than an unleveraged one, in both directions. The trader’s real control is not the leverage ratio the broker offers. It is the chosen position size, the deposit kept in reserve, and the exit level set before the trade opens. 

Two traders can use the same 500:1 account and face completely different risk, simply because one commits a small fraction of capital per trade and the other commits most of it. The ratio is the tool. Position sizing is the decision that shapes the outcome. To see where leverage fits within the wider market, start with EBC’s overview of what forex trading is and how traders make money.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.