Leverage shows the ratio of the investor’s own assets to the amount of the transaction, taking into account the money or securities provided on credit.
Alexey has 100,000 rubles to buy shares. The broker is ready to lend him another 400,000 rubles so that the transaction amount is 500,000 rubles. In this case, the leverage will be 1:5.
How much money or securities the intermediary will lend depends on three factors.
The minimum risk rate, or discount, for each instrument is calculated daily by clearing organizations. For example, for securities traded on the Moscow Exchange, discounts are determined by the National Clearing Center (NCC). Brokers can set other discounts for securities for their clients, but they should not be lower than the stock exchange figures.
When calculating the discount, the clearing organization takes into account:
liquidity of a security – the ability to quickly sell it at a fair price,
volatility – how sharply and strongly its price can change.
The more difficult it is to find a buyer and the greater the price fluctuation, the higher the discount and the less leverage for this instrument. To calculate the maximum allowable size of a leveraged trade, the broker divides the amount of the client’s own funds by the discount.
NCC set a discount of 0.2 for Superbank shares. If Aleksey had 1 million rubles in his account, he could buy shares for a maximum of 1,000,000 / 0.2 = 5,000,000 rubles using a margin loan. That is, the maximum leverage for this instrument is 1:5.
But for many investors, discounts for most instruments will be higher than the minimum, and the leverage will be less than the maximum. It depends on another indicator – the level of risk that is assigned to the person himself.
2. Investor risk level
It is determined by the broker. By default, when opening an account, a new client is automatically assigned a standard, or initial, risk level.
An increased level of risk is received by an investor who has at least 3 million rubles in money or securities on a brokerage account. Or when it meets three requirements at once:
- the amount of his assets in the account exceeds 600,000 rubles,
- the investment account was opened more than 180 days ago,
- on at least five of those 180 days he made trades.
For investors with a higher level of risk, the discount calculated by the clearing organization for the instrument is used. And for less wealthy and inexperienced clients, the broker will set a higher discount for each instrument.
Alexey has been actively trading for more than six months, but he has only 100,000 rubles on his account. So, he has a standard level of investor risk. He wants to buy shares of Superbank, to which the NCC assigned a discount of 0.2, but the broker determined it for Alexey at the level of 0.4. As a result, the transaction amount cannot exceed 100,000 / 0.4 = 250,000 rubles. That is, the maximum leverage will be 1:2.5.
Discounts for each security and available transaction amounts, which already take into account the investor’s risk level, can be viewed in your personal account on the broker’s website or in your trading terminal.
3. Margin size
The broker calculates this indicator for the client before each of his transactions with leverage. Margin – the value of assets on the investor’s account, taking into account the discount on them, which remains pledged to the broker. Only the most liquid instruments are summed up: money and securities that are easiest to sell – each broker publishes their list on their website.
Alexei bought shares for 100,000 rubles and deposited another 100,000 rubles into a brokerage account. Purchased shares are taken into account in the calculation of the margin with a discount of 0.5. Therefore, the broker evaluates them not at the current market value, but with a coefficient of 0.5. That is, the margin was: 100,000 (money in the account) + 50,000 (value of shares, taking into account the discount) = 150,000 rubles.
As profits or losses rise, margins rise or fall accordingly. But the broker usually makes sure that the margin does not fall below the minimum, which is guaranteed to allow the client to pay off the loan.
The maximum margin loan amount is determined by the broker using the following formula: the margin is divided by the discount of the instrument and then the amount of the investor’s own money is subtracted.
Aleksey wants to buy Superbank shares, for which the discount is 0.4. Aleksey has 100,000 rubles on his balance sheet, but taking into account other securities on his account, the broker estimated the margin at 150,000 rubles. This means that he can spend a maximum of 150,000 / 0.4 = 375,000 rubles on Superbank shares. Of these, 100,000 will be invested by the broker himself and 275,000 rubles will be borrowed by the broker.
In fact, there is no need to delve into the calculations of leverage and credit, taking into account margin and discount. When choosing an instrument in the broker’s terminal, you will already see exactly how many selected securities and for what amount you can buy in the margin trading mode.
However, it is not necessary to use the maximum available leverage, especially if you are just starting to trade. After all, leverage acts as a lever, multiplying both your profits and losses.