Do You Have To Pay Back Leverage?
When you open a leveraged position in forex, crypto, or stock trading, you are obligated to pay back the leverage you used to your broker. This happens automatically at the time when you hit the sell button and your trade is closed out.
To learn more about leveraged positions and how they work, I recommend reading these articles as well:
- What is a leveraged position?
- How leverage affects losses
- Can you lose more money than invested with leverage?
- Why do brokers offer leverage?
These guides will help you get a better understanding of how leverage affects your open positions and how a leveraged account works in detail. In this article, I will explain how it works when you pay back leverage to your broker in the case of a loss, a profit, or a break-even trade.
- You always have to pay back leverage in forex, crypto, and stock trading which is done automatically when you close out your position in either a loss or a profit.
- The amount of leverage you have to pay back to your broker is equivalent to the amount borrowed when the leveraged position was opened, nothing more, nothing less.
- Losing money with leverage does not mean that you owe your broker money and you can not go into debt as long as your broker operates with a negative balance protection system.
When trading on leverage, it is important to separate your own money from the money that is borrowed from the trading platform. Once you understand that your money belongs to you and the borrowed money (leverage) belongs to the broker it will become easier to understand how much is paid back to the broker as leverage.
Keep reading to find out how it works in your market.
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 leveraged 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 leverage has to be paid back to the broker, not your own 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 leverage 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 leverage through a crypto exchange you will have to pay back the amount of leverage borrowed to open the position.
The same rules apply for leveraged crypto trading as to any other market.
By separating your margin capital in your account and the leveraged 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 leverage to your leveraged 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 with leverage 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 leverage ratio of 1:65 the total position value would be $78,000.
Now, since your initial deposit into your leverage stock trading account was $1200 then the total amount of borrowed money (leverage) is $76,800.
That is the amount of leverage 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 leveraged 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 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 with leverage, the total loss is always calculated on the total position value.
Suppose you trade the stock Microsoft with a leverage 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 remanding portfolio of $125.
So, whenever you lose money on a leveraged trade the loss is calculated on the full position size including both your account balance and the leverage.
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 leveraged 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, leveraged trading 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 there is no system that 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
Leveraged trading is a way of using borrowed money to increase your buying power.
To use leverage you are asked to put up margin collateral for the loan.
The leverage is only added to your position after choosing the correct leverage ratio.
See these guides to learn more about leverage ratios:
- What leverage ratio is best in forex?
- What leverage ratio is best for beginners?
- What leverage ratio is best for crypto?
When combining your collateral money with a leverage ratio your purchasing power is multiplied.
This increases your output of both profits and losses.
When you open a position, the leverage is added to the trade and once you close out the position the leverage is returned to the broker.
How to calculate the leverage you owe your broker
If you happen to lose more money than your total collateral balance then you will owe money to your broker.
Now, the easiest way to calculate the amount of money that you owe is to deduct the total loss from your total account balance.
Let’s say that you made a deposit of $800 and you took a loss worth $1400.
Then you need to deduct the $1400 from your own collateral money.
This would result in -$600 which would be the amount of money you owe to your broker.
The calculation looks like this:
Total margin collateral – Total loss = Amount owed 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 leveraged position.
Most beginners struggle with large losses and they find it difficult to manage 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 leverage ratio of 10x you will be paying $3 each time to enter and exit the market.
Also, leveraged traders very often suffer total account liquidations due to the lack of proper risk management.
Beginners that trade markets with leverage without using a stop loss are the ones that are most affected by oversized losses and liquidations.