Leverage is the reason a trader with $1,000 can control a $50,000 position. It's also the reason that same trader can lose their entire account on a move that would barely register for a cash-funded investor. Understanding exactly how leverage and margin interact isn't optional — it's the difference between using a tool and getting used by one.
Leverage: controlling more than you put down
Leverage lets you control a large position size while only committing a fraction of its value from your own account. It's expressed as a ratio — 1:50, 1:100, 1:500 — describing how many times your capital is effectively multiplied. At 1:100 leverage, $1,000 of your own money can control a $100,000 position.
Leverage itself doesn't cost anything and isn't inherently dangerous — what's dangerous is sizing a position as if the leverage weren't there. The position's profit and loss is calculated on the full leveraged size, not on the margin you put down, which is exactly where undersized accounts get into trouble.
Margin: the collateral, not a fee
Margin is the amount your broker requires you to set aside from your account to open and hold a leveraged position. It is not a cost or a transaction fee — it's collateral, and it's returned to your available balance once the position closes. Margin and leverage move inversely: higher leverage means a smaller margin requirement for the same position size, and lower leverage means a larger one.
At 1:100 leverage, opening a $100,000 position requires $1,000 in margin (1%). At 1:500 leverage, the same $100,000 position requires only $200 in margin (0.2%). The position size and its risk are identical either way — only how much of your own capital is tied up as collateral changes.
Where the real risk lives
Here's the number that matters more than the leverage ratio itself: at 1:500 leverage, a move of roughly 0.2% against your position is enough to wipe out the margin backing it. That's not a crash — that's a completely ordinary intraday swing for most instruments. High leverage doesn't create risk on its own; it just removes the buffer that would otherwise absorb a normal, unremarkable price move.
This is why "how much leverage does my broker offer" is the wrong question to be asking day to day. The right question is "what position size does my risk management call for" — leverage only determines how much margin that position ties up, not how big the position itself should be. Get the sizing right first (see our position sizing guide), and the leverage your broker offers becomes almost irrelevant to your actual risk.
Margin calls and stop-outs
If losses eat into your account enough that your equity falls below the broker's required margin level, you'll typically get a margin call — a warning that you need to add funds or close positions. If it falls further, to the broker's stop-out level, positions get force-closed automatically, often at the worst possible moment, regardless of what your own stop-loss was set to. Sound position sizing is what keeps you out of this territory entirely, rather than relying on the broker's stop-out as a backstop.
Working it out before you trade
PipDesk's Margin Calculator shows the exact margin required, and your free margin remaining, for any position size and leverage ratio before you open the trade. Pair it with the Lot Size Calculator to convert between standard, mini, and micro lots when comparing position sizes across brokers with different conventions.
Key takeaways
- Leverage determines how much position you control; margin is the collateral required to hold it — they move inversely.
- Profit and loss is always calculated on the full leveraged position size, not the margin you put down.
- Higher leverage doesn't automatically mean higher risk — undersized positions relative to your account do.
For a deeper technical breakdown of the relationship between the two, see Babypips' guide to margin vs. leverage.