This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Initial margin and leverage are the two sides of the same idea. The initial margin is the deposit you put down to open a leveraged position. The leverage is the ratio of the position size to the deposit. If you put €1,000 down to open a €5,000 position, the initial margin is €1,000 and the leverage is 5:1. The two numbers are connected by a simple formula, and the formula is the basis of every margin call calculation.
The formula
The relationship is: initial margin = position size / leverage ratio. Or equivalently, leverage ratio = position size / initial margin. The leverage ratio is the multiplier on the trader's deposit, and the initial margin is the dollar amount of the deposit.
The regulator sets the maximum leverage ratio for retail traders. ESMA in the EU caps retail leverage at 1:5 for major stocks. The FCA in the UK has similar caps. ASIC in Australia has tightened its rules to match. Offshore brokers can offer higher leverage, but the regulatory protection is thinner. The maximum leverage the broker advertises is the maximum leverage the regulator allows for the trader's account type in the trader's jurisdiction.
What initial margin covers
The initial margin is the deposit that secures the position against a default by the trader. If the position moves against the trader and the trader's equity falls below a threshold, the broker issues a margin call. The initial margin is the buffer the trader has before the margin call fires. A 5:1 leveraged position on a major stock has a 30% maintenance margin in many jurisdictions, which means the trader's equity has to fall by 30% from the initial level before a margin call fires. On a 5:1 position, a 30% drawdown on the position is a 6% move against the trader. After a 6% move, the broker will start to worry.
The relationship between the initial margin and the maintenance margin is the trader's runway. A high initial margin with a low maintenance margin gives the trader a long runway. A low initial margin with a high maintenance margin gives the trader a short runway. The brokerage's published margin rates are the first number; the second number is harder to find and often requires reading the legal documents.
The asymmetry of leverage
The same leverage ratio that amplifies a 5% gain into a 25% return also amplifies a 5% loss into a 25% loss. The 25% loss is harder to recover from than a 5% loss, because the trader needs a 33% gain to get back to even. The compounding effect of the loss is one reason brokers cap leverage at lower levels for retail traders than for professional or institutional clients. The cap is a recognition that retail traders are more likely to misjudge the asymmetry.
The asymmetry is most punishing in a fast market. A position that gaps down at the open can move 10% or more in a single session, which on a 5:1 position is a 50% loss of the trader's capital. A 50% loss requires a 100% gain to recover, which most traders cannot produce in the time available. The position is closed by the broker at the worst moment, and the recovery is not possible.
How to think about the right initial margin
The right initial margin is the one that produces the correct dollar risk at the stop, not the one that produces a specific leverage ratio. A trader with a €10,000 account, a 1% risk per trade, and a stop 5% away from entry needs a position size that produces a €100 loss at the stop. The initial margin is whatever the position size requires, and the leverage figure is whatever the position size implies.
A common rule is to size the position so the dollar risk is 1% of the account, regardless of the leverage. The leverage is the result, not the input. The trader does not need to think about whether the leverage is 2× or 5×. The trade is the same.
How regulators treat the relationship
Regulators treat initial margin and leverage as a single concept. ESMA's leverage caps for retail traders are set in terms of initial margin. The 1:5 cap on major stocks means an initial margin of 20% of the position value. The 1:2 cap on minor stocks means an initial margin of 50%. The cap is set in terms of the initial margin, but the language is interchangeable with leverage, because the two are inverses.
The regulator's leverage cap is not the broker's leverage cap. The broker can apply a tighter cap if the underlying is less liquid, the trader is less experienced, or the broker's risk policy requires it. The published cap is the maximum, not the floor.
Related resources
Where to start
If you are comparing brokers for leverage availability, the most useful figures are the initial margin for the instruments you want to trade, the maintenance margin, and the margin call policy. Our broker comparison lists the leverage and the eligible instruments at each broker, which together tell you what the cost and the risk look like before you open the position.