Margin Leverage Calculator

Formula

The formula to calculate margin leverage is:

\[ \text{L} = \frac{\text{E}}{\text{E} - \text{M}} \]

Where:

(L) is the leverage ratio
(E) is the total equity in the account ($)
(M) is the margin loan amount ($)

What is Margin Leverage?

Margin leverage refers to the practice of using borrowed funds from a broker to trade financial assets, which forms the collateral for the loan from the broker. This strategy allows investors to amplify their buying power and potential returns, but also increases the risk of losses. The leverage ratio is determined by the amount of margin (borrowed money) used in the transaction compared to the investor’s own funds.

Example Calculation

Let's assume the following values:

Total Equity in the Account = $100,000
Margin Loan Amount = $20,000

Using the formula:

\[ \text{L} = \frac{100000}{100000 - 20000} = \frac{100000}{80000} = 1.25 \]

The leverage ratio is 1.25.