Do You Have To Pay Back Leverage?

Do you have to pay back leverage in forex?

If you are trading forex with 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.

Here’s a technical example to illustrate how the repayment works on a leveraged forex position.

Assume a trader posts $600 as margin and opens a position levered 100:1. High leverage like this is generally reserved for experienced traders.

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 trading?

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.

For illustration, assume a position worth $50,000. Large notional values can reverse aggressively when volatility spikes, even if the posted margin is small.

Profits and losses are deducted or added to your margin balance ($800).

Regardless of the ratio, borrowed capital must be repaid. Higher ratios simply shrink the room between your entry and potential liquidation.

This goes for both long trades and short trades.

Do you have to pay back leverage in stock trading?

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.

If price crosses the liquidation threshold, the platform forcibly closes the position to prevent further losses. This often leaves little or none of the posted margin.

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.

Do you get charged for using margin?

There are two types of fees in leverage trading.

1. Trading fee = The trading fee is charged whenever you open or close a position and is calculated on your total position size.
2. Spread = Spread is the difference between the bid and the ask price in the order book.
3. 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.

Fees scale with position size, so increasing leverage increases cost even when trades are flat or losing.

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 it put you in debt?

Debt risk is uncommon on regulated platforms with balance protection, but it is a real risk on unprotected venues. Traders should confirm protections before depositing anything.

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.

What is the downside of it all?

The biggest downside to using leverage in trading is the amplified losses and the fact that it might be difficult to control a position.

Traders who borrow capital without a strict risk system tend to liquidate quickly. A stop-loss is not optional when exposure is magnified.

Larger position size increases both fees and liquidation sensitivity. High multipliers reduce the margin for error to almost zero.

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.