An example: I have 1000 dollars, the leverage is 10x, and one stock is 10$. In casual situation I could buy 100 stocks, because I have 1000 dollars, but if I use the leverage I can buy 1000 stocks.

I see the mechanism, how it works, but I don't know how do that +9000 dollars come from. Because in deed I do not have that 9000 dollars, so I will pay 'non-existent' money, but when I sell, I get it back existent money. Furthermore the person/company who sell their stocks will get existent money too.

Where does it come that plus 9000? Or who pays off that plus amount?


1 Answer 1


You borrow that money from your broker. If you are retail client with for example IG they will offer this service to you. They will charge you some interest for the lending.

There will be a margin account into which you need to deposit your cash. If the leveraged position you have loses money on the M2M and amount in margin account goes below a threshold, they will call you and ask to deposit more cash in the margin account. Else they will liquidate your positions.

By having this system, where you need to replenish the margin account. In theory if losses are small and continuous (no jumps), the broker in theory never loses money. Losses are all paid for by the amount in your margin account, and positions will be liquidated before it eats up the brokers money. In reality this does not hold due to jumps in prices etc.

  • $\begingroup$ So if I trade with leverage I have to pay the cost of the position opening (and closing) and the interest of the borrowed amount too? So the longer position will be more and more expensive... $\endgroup$ Dec 31, 2015 at 11:56
  • 1
    $\begingroup$ yes exactly. The link below gives you some more details. schwab.com/public/schwab/nn/articles/Margin-How-Does-It-Work $\endgroup$
    – mbison
    Dec 31, 2015 at 12:48

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