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Leverage and Margin

Leverage

Leverage is the mechanism whereby your CFD margin deposit controls an asset of multiple times greater value, offering a magnified trading impact and accelerated return. For example: You deposit $1,000 and your Equity is $1,000 and the leverage offered is 1:30 (or lower). Your leveraged amount is 1,000 x 30 = $30,000. The Required Securities (margin deposit) is displayed on each pop-up trade screen. Leverage is a technique used to multiply gains; however leverage can also multiply losses. Remember, the high degree of leverage can result in substantial losses.

Note that margin requirements usually increase proportionately to the value of the underlying trade asset.

What is a Margin Call?

Your Margin is monitored in real time, providing you with the benefit of knowing where you stand at all times. The Maintenance Margin level is the minimum amount of equity needed to maintain an Open Position. Should your equity fall below the minimum amount, Xtrade will automatically execute a Margin Call trade and close any open positions until your account equity exceeds the Maintenance Margin level requirement.

Example of a Margin Call:

Say you deposit $25,000 in your CFD account. Your account will appear as follows:

  • Equity: $25,000. (Deposits - Withdraws + P&L of opened positions + Closed P&L).
  • Available Balance: $25,000 (Equity- used Margins).
  • P&L = $0 (total profit and loss of all open positions including daily Premiums).

There are some other important concepts that you need to understand when reading this example.
The first is Initial Margin. Initial Margin is the amount of margin required to be posted to your account in order to open a position. In this example, the Initial Margin requirement is 20% (as required by the ASIC Rules).
The second important concept is Maintenance Margin. This is the minimum amount of Equity that must be available in your account to maintain your open positions and avoid it or them being automatically terminated under the ASIC Rules. Maintenance Margin is fixed at 50% of the Initial Margin. If your Equity goes below the Maintenance Margin threshold, Xtrade is required by law to close-out your positions until your Equity returns to above the Maintenance Margin threshold, or until all of your open positions are closed out, whichever occurs first.

**In our platform we call Initial margin Required Securities

  • 10.20am – You buy 200 Google shares (CFDs) at $590 per share
  • The total value of this trade is $118,000 ($590*200).
  • Your Initial Margin is $23,600 (20% * $118,000 = $23,600).
  • Your Available Balance at this point is $1,400 ($25,000 initial equity - $23,600 Initial Margin requirement).
  • The Maintenance Margin is $11,800 (50%*$23,600=$11,800).
  • This means that if the value of your position on the 200 Google shares were to decrease and your equity fall below $11,800, then your Equity will have fallen below the Maintenance Margin threshold and Xtrade is required by the Rules to terminate your open positions.

1.00pm - Google shares drop to $560 per share

  • The total value of 200 shares of Google has declined to $112,000 (i.e. a $6,000 decrease in value from when you initially purchased the shares).A loss of -$6000 has been incurred (200*($560-$590)).
  • 'Equity' is therefore $19,000 ($25,000 initial equity - $6000 loss). At this point your equity has not fallen below the Maintenance Margin threshold of $11,800. You may be asked to provide more margin, but your position will not be terminated.

1:15 pm - Google shares fall to $520 per share

  • The total value of 200 shares of Google has declined to $104,000. A loss of -$14,000 has been incurred (200*($520-$590)).
  • Your Equity is now $11,000 ($25,000 initial equity - $14,000 loss). At this point, your Equity is $11,000. This is below the $11,800 Maintenance Margin threshold required to maintain an open position on 200 Google Shares. Therefore, your Google shares will be liquidated by Xtrade.

Following this liquidation, your balance is:

  • Equity: $11,000.
  • Available Balance: $11,000 (Deposits - Withdraws + P&L of closed positions+ Open P&L – Used Margin).
  • P&L = $0 (no open positions remaining).

The reason you received a Margin Call is because your Equity is $11,000 and you need $11,800 to maintain an open position on 200 Google Shares. Therefore, Xtrade has liquidated your position. Your current balance is:

Initial Margin

To open a new position, your available account equity must exceed the trade's initial margin level requirement. Margin levels vary among the different financial instruments.

You can view your required margin total under the My Account bar on the left side of the trading platform page. Please be aware that your initial margin is continuously monitored in real-time.

Maintenance Margin Level

To keep your new position open, the equity in your account must exceed the total Maintenance Margin Level. The Maintenance Margin Level requirements are specific to each financial instrument. Xtrade always displays the Maintenance Margin level for each individual instrument.

You can view your Maintenance Margin under the My Account Bar on the left side of the Main Page. Please remember that your Maintenance Margin is continuously monitored in real-time.

Safety Measure

For financial safety, and also in line with our regulator's requirements, if additional margin is not provided, Xtrade will automatically close out positions on your behalf. Remember, the higher the leverage the higher the risk of losing your deposited capital. Leverage can work both for you as well as against you.

Trading CFDs involves significant risk of loss. Trading FX/CFDs involves a significant level of risk and you may lose all of your invested capital. Please ensure that you understand the risks involved.