Do you have to pay back leverage in forex?
If you are trading forex on leverage, it involves borrowing money from your broker just the same way as in any other market. The total amount of borrowed money you add to your position always has to be paid back to your brokerage.
But remember, only the amount of credit has to be paid back to the broker, not your margin capital.
Let’s describe this with an example.
Suppose you have $600 as margin capital in your forex trading account and you want to use a leverage ratio of 100x to increase your purchasing power.
This means that you are borrowing $59,400 and your total position value is $60.000.
Once you open the trade you will have the full trade value of $60.000 in the market.
When you close out the position, either at a loss or a profit you are obligated to pay back the borrowed capital to your broker which in this case was $59,400.
The margin capital ($600) goes back into your trading account after deducting losses or adding profits.
In forex, the same rules apply for both short and long trades.
Do you have to pay back leverage in crypto?
When you trade crypto with margin through a crypto exchange you will have to pay back the amount of capital borrowed to open the position.
The same rules apply to crypto trading as to any other market.
By separating your margin capital in your account and the money borrowed to open positions you know how much you need to pay back.
Let’s say that you open a position worth $50,000 and your initial deposit is worth $800, then you need to pay back $49,200 in credit to your crypto trading platform.
Profits and losses are deducted or added to your margin balance ($800).
It doesn’t matter what leverage ratio you use in crypto, you always have to pay back the amount of borrowed money to the exchange.
This goes for both long trades and short trades.
Do you have to pay back leverage in stocks?
When trading stocks you are also asked to pay back the total amount of leverage used to open your position.
For example, if your account balance is $1200 and you wish to trade Tesla with a ratio of 1:65 the total position value would be $78,000.
Now, since your initial deposit into your stock trading account was $1200 then the total amount of borrowed money is $76,800.
That is the amount of borrowed capital you need to pay back when the trade is closed.
It doesn’t matter if you made a profit or a loss on the position, you always need to pay back the total amount of leverage borrowed from your stock broker.
The same rules apply for both long and short trades.
Do you owe money if you lose with leverage?
There are different answers to this question and as you will see, it all comes down to what kind of trading platform you are using and whether or not it supports negative balance protection.
In the case that your broker offers negative balance protection:
No, you don’t owe more money if you lose with leverage, you always have to pay back the borrowed money, nothing more and nothing less.
What happens if you pass your liquidation price is that your account will get liquidated but it will not go into debt.
Related: Liquidation price calculator
If the case that your broker platform doesn’t offer a negative:
Yes, it is possible to owe money to your broker if you lose more money than what you have deposited into your trading account.
For example, if your initial deposit into your trading account is $500 borrow $9,500 to trade the forex pair EUR/USD, your total position value would be $10,000.
Now, this is much more than you have deposited into your account.
Unless you lose more money than your initial deposit ($500) you can’t go into debt with your broker.
However, if your forex broker doesn’t have a negative balance protection system, then it is possible to lose more than your account balance ($500) and owe your broker money.
You could end up losing -$1000 which is more than you initially deposited which would mean that you now owe the broker $500.
What happens if you lose with leverage?
Losses in leverage trading are treated the same way that losses in spot trading are, however, they tend to get much bigger due to bigger position size.
When you lose, the total loss is always calculated on the total position value.
Suppose you trade the stock Microsoft with a ratio of 1:75 and your account balance is $500.
This will give you the purchasing power of $37,500.
Now, if you lose money on that trade, let’s say -1%, this money will be calculated on the full position size ($37,500).
The total loss would be $37,500 minus 1% which equals $375.
If we deduct this loss from your total account balance it would leave you with a remaining portfolio of $125.
So, whenever you lose money on a margin trade the loss is calculated on the full position size including both your account balance and the multiplier.
Do you get charged for using leverage?
There are two types of fees in leverage trading.
- Trading fee = The trading fee is charged whenever you open or close a position and is calculated on your total position size.
- Spread = Spread is the difference between the bid and the ask price in the order book.
- Overnight fee = The overnight fee is an interest payment for borrowing money from the broker and is charged every day at around midnight.
Every time you open or close a trade with leverage you will pay a trading fee.
This fee is typically a percentage of the full position size.
Your broker may also charge you a spread cost for opening and closing the trade.
The spread is the difference between the bid and the ask price.
Every time you hold a position overnight you will pay the overnight fee or management fee as it is also called.
The overnight fee works the same way as your car loan or mortgage which has a monthly interest payment.
Can leverage put you in debt?
Yes, it can put you in debt, but it happens very rarely.
Only when you trade with a shady broker, trading platform, or crypto exchange that doesn’t offer negative balance protection can you go into debt.
This happens when you lose more money than you have deposited into your account and no system prevents the losses from getting bigger than your total account size.
Most popular brokers today offer great risk management systems for traders to avoid these worst-case scenarios.
Leverage in trading explained
It is a way of using borrowed money to increase your buying power.
To use borrowed money you are asked to put up margin collateral for the loan.
The credit is only added to your position after choosing the correct ratio.
See this guide to learn more about ratios:
- What leverage ratio is good in forex?
When combining your collateral money with a ratio your purchasing power is multiplied.
Leverage increases your profits and losses.
When you open a position, the borrowed money is added to the trade, and once you close out the position the funds are returned to the broker.
What is the downside of leverage?
The biggest downside to using leverage in trading is the amplified losses and the fact that it might be difficult to control a position.
Most beginners struggle with large losses and they find it difficult to manage how to use high leverage in trading.
Another aspect of borrowing money is that when you increase your position size 10 times, 50 times, or perhaps 100 times, your fees increase proportionally as well.
If you used to pay $0,30 per trade, with a ratio of 10x you will be paying $3 each time to enter and exit the market.
Also, traders very often suffer total account liquidations due to the lack of proper risk management.
Beginners who trade markets without using a stop loss are the ones who make the most mistakes with oversized losses and liquidations.
To learn more about leveraged positions and how they work, I recommend reading these articles as well:
- What is a leveraged position?
- Can you lose more money than invested with leverage?
- Why do brokers offer leverage?
