Maximum Leverage

What Is Maximum Leverage?

Maximum leverage is the biggest allowable size of a trading position permitted through a leveraged account. Leverage includes utilizing borrowed funds to purchasing securities or investments. In brokerage accounts, leverage can be gotten as margin, an honest intentions deposit with the broker to buy or sell a bigger position than the amount deposited.

Leverage can increase the extent of gains or losses on a trade, thus it can increase the volatility and the risk of a portfolio.

Grasping Maximum Leverage

Because of the risky idea of trading with borrowed funds, rules and regulations in regards to a maximum allowable amount of leverage for stock trading were laid out under Regulation T, which lays out least amounts of collateral or margin that must be close by for credit to be extended to clients. Brokerage firms could impose more rigid requirements to limit risk further.

Foreign exchange trading has substantially more loosened up standards. Leverage on currency trades can be somewhere in the range of 50 to 400 times. Surpassing or even drawing near to the maximum leverage point can be an untenable situation for forex traders, since a small price movement can rapidly clear out the whole amount of equity in the trading account. In the futures market, maximum leverage depends on futures margin requirements, which are honest intentions deposits and regularly equivalent to 5% to 15% of the value of the futures contract.

Instances of Maximum Leverage

Brokerage firms are able to lay out their own rules for how much leverage they permit to be set when their clients trade and how much collateral must be available. Nonetheless, the Federal Reserve Board laid out Regulation T which expects half of the purchase price of a stock position be on deposit. For instance, an investor can not borrow more than $1,000 to buy $2,000 worth of stocks inside a brokerage account.

Currency trading has its own rules. Commonplace leverage available on currency pair trades through forex trading institutions goes from 50 to 400 times. With a leverage ratio of 50, for instance, an individual with a margin deposit of $5,000 can start a maximum leverage trading position of up to $250,000.

While trading futures, specific margin amounts are set by the futures exchange and not set in stone by the volatility of the futures contract. For instance, in the event that a crude oil futures contract addresses 1,000 barrels and, assuming crude is trading $55 per barrel, the size of the contract is $55,000 (1,000 x $55). Assuming margin is $4,350, or generally 8% of the contract size, that amount is the maximum leverage while trading one oil futures contract.

Features

• Stock investors are permitted to borrow up to half of the value of a position under Reg T, however some brokerage firms might impose more rigid requirements.
• Maximum leverage in the currency (forex) markets can be very high; a few firms permit leverage of more than 100:1.
• Maximum leverage is the biggest position size permitted in a leveraged account in view of a client's margin requirements with their broker.
• Futures margin requirements and maximum leverage will shift contingent upon the specific product being traded.