What is Leverage?
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When it comes to trading CFDs on forex and other financial instruments, leverage is considered a fundamental tool. It gives you the chance to use small capital to strike a deal that needs much greater capital.
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This way, the leverage enables you to loan out money from a trading broker so as to open larger trades.
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For example, if your account balance is only USD 100, when you use a leverage of 1:1000, your account purchasing power will become USD 100,000
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That’s to say, the leverage allows you to snowball the purchasing power of your account balance in order to enter into larger trades with ease.
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At the same time, however, leverage is considered a very dangerous instrument. Although it gives you the chance to blow up your profits, this also means that if you are not cautious enough regarding how to use your liquidity and how to invest it, leverage may result in doubled losses.
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What is Margin?
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It is the amount you are required to deposit to open a trade using leverage.
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Margin is calculated as a percentage of the trade value. For example: If you have a leverage of 10:1 and open a trade of 1,000 USD, the required margin will be 100 USD (10% of 1,000 USD).
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When a trader buys an asset using margin, he/she places an initial deposit (usually a percentage of the asset value) with the broker. The remainder represents a loan from the broker. Interest is charged on this loan, which the trader must repay to the broker.
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It should be noted that this type of trading is done in non-Islamic accounts or those that charge overnight interests. While in Islamic accounts, no interest is added, making them Sharia-compliant.
