The Definition of Leverage and Margin

What is Leverage?

Leverage means using capital borrowed from a broker when opening a position. Sometimes traders may wish to apply leverage in order to gain more exposure with minimal equity, as part of their investment strategy. Leverage is applied in multiples of the capital invested by the trader, for example 2x, 5x, or higher, and the broker lends this sum of money to the trader at the fixed ratio. Leverage may be applied to both buy (long) and short (sell) positions. It is important to note that any losses will be multiplied as well as profits.

What is Margin?

A margin is the relative amount needed to carry out a leveraged deal, taking into account spreads, leveraging, and currency conversions. Let’s say you want to invest $1,000 in Apple stock at a leverage ratio of 1:10. The margin will be 10%, meaning you will need to invest $100. If the current stock price for Apple is $136, you will receive the equivalent 7.35 Apple shares.

How Does Leveraging Work?

  1. Choose the asset you are interested in trading on the eToro platform and click TRADE. A popup window with the trade parameters will appear, as illustrated below.
  2. Select the appropriate tab at the top for Sell (short) or Buy (long) for your trade.
  3. Set the amount of capital you wish to invest in this trade. Set your leverage multiplier. This ratio differs depending upon the individual asset. Alternatively, you can also trade without using leverage by choosing 1x.
  4. Set your Stop Loss and Take Profit parameters. A Stop Loss limitation is required in order to mitigate the possible risk to your capital.
  5. Click SET ORDER to place the trade. Trades are executed immediately when the market is open.
  6. Leveraged trades are processed as CFDs. To learn more about CFD trading, click here.

Which Instruments Can I Apply Leverage To?

Leverage may be applied when trading stocks, currencies, ETFs, commodities and indices, and, in certain circumstances, cryptocurrencies. Each instrument has maximum leverage limitations which are guided by industry regulations, as well as eToro’s own efforts to promote responsible trading and mitigate the risks of trading with high leverage. For more information on specific limitations, click here.

Maximum exposure will also vary by account type. An eToro Professional Client account allows for higher leverage, as well as a host of other benefits such as reduced margin rates and no withdrawal fees. Only clients who meet certain criteria can opt up to become a Professional Clients. If you wish to read more about Professional Client status, please click here.

What Can I Do To Minimise Risk When Trading With Leverage?

While trading with leverage can lead to increased profits on successful trades, it also carries the risk of magnified losses. There are, however, risk-management tools at your disposal on eToro to help reduce potential loss.

  • Stop Loss: Apply a Stop Loss to close a trade in the event that the market moves a specified amount against your position. You can set your Stop Loss according to a specific level in the market (Rate) OR as a monetary amount, also shown as a percentage of your initial investment, in the trade window.
  • Take Profit: Set a Take Profit order to automatically close your position when profit on your trade hits the amount you choose.
  • Negative balance protection: Although not required by law, in the rare occasion in which market conditions cause your account’s balance to go negative, eToro will absorb the loss and balance your account back to zero.

What Are The Fees For Trading With Leverage?

Overnight fees (also called rollover fees) are calculated using unified equations and will appear in the trade popup window before you set your order. To learn more about how these rates are calculated, click here.

Examples of leverage:

Invested Amount Leverage Trade Size
$50 1:20 $1,000
$200 1:30 $6,000
$400 1:10 $4,000

 

  • On eToro, each instrument has its own leverage minimum and maximum, so make sure to choose a leverage level which is right for you.