What Is Leverage and Margin? How Trading on Margin Works

Leverage is holding a position larger than the money put up for it, and margin is that money: collateral a broker or exchange holds against position losses.

Liquidations, open interest and perpetual futures all build on these two ideas. This page covers how leverage is measured, what initial and maintenance margin are, how a margin call or a liquidation follows from them, how isolated and cross margin differ on crypto venues, how futures margin and stock margin accounts work, and what leverage does and does not change about the loss on a position. Every number in the examples is an illustrative round figure, not a live price or a venue's actual setting. It is descriptive throughout.

Leverage: notional value over equity

The size of a position is its notional value: quantity times price. One Bitcoin at $60,000 is $60,000 of notional, whether it was paid for in full or not. Leverage compares that exposure with the money behind it:

Leverage = notional value / equity

Two versions of "equity" are in common use, and they give different numbers for the same position.

• Position leverage divides by the margin posted for that one position. $1,000 of margin behind $10,000 of notional is 10x. This is the figure a crypto venue's leverage setting refers to.
• Account leverage divides by the whole account's equity. The same $10,000 position in a $20,000 account is 0.5x of the account, even though the position itself is set at 10x.

On isolated margin, the first number decides how close a liquidation sits; the second describes how much of the account is exposed in total.

Initial margin and maintenance margin

Margin has two levels.

• Initial margin is the collateral required to open a position. At a 10x setting it is one tenth of the notional value.
• Maintenance margin is the lower floor the position's equity has to stay above once it is open. Its size depends on the market: on crypto perpetual venues it is a small percentage of notional that rises in tiers as the position grows, a futures exchange sets it as an amount per contract, and in a US stock margin account the minimum is 25% of market value, covered below.

Equity starts at the initial margin and moves with the position's profit and loss. A gain adds to it, a loss eats into it. When losses bring equity down to the maintenance level, one of two things happens, depending on the market. A broker issues a margin call, asking for more collateral, or an exchange's risk engine liquidates the position, closing it by force at the market. Crypto perpetual venues use the second route. The mechanics of that forced close, and how it can cascade, are in what a crypto liquidation is.

Worked example: same margin, four leverage settings

Take $1,000 of margin on a long position, isolated (explained below), with an illustrative maintenance margin rate of 0.5% of notional. Fees and funding are left out.

The third column is simple arithmetic. At 10x, a 10% fall on $10,000 is a $1,000 loss, which is the whole margin. In general the move that erases the margin is 1 divided by the leverage.

The last column is slightly shorter, because the venue does not wait for equity to reach zero. It closes the position when equity falls to the maintenance margin, here 0.5% of the position's value at the mark price. At 10x, equity is $1,000 minus $10,000 times the fall, and the maintenance requirement is $50 times (1 minus the fall). The two meet at a fall of about 9.55%. A quick approximation is 1 divided by the leverage, minus the maintenance rate: 10% minus 0.5% gives 9.5%. Real liquidation prices also move with fees, funding payments and the venue's tier table, so any figure like this is an approximation. The check itself runs on the mark price, not the last trade, as the perpetual futures explainer covers.

What leverage changes: margin and the liquidation price

For a position whose size is fixed before the leverage is chosen, higher leverage does not mean a bigger loss.

Take a $20,000 account that puts 1% ($200) at risk on a long, with a stop 4% below entry. The quantity that loses $200 at a 4% move is $200 / 4% = $5,000 of notional (the steps are in how to calculate position size). Now vary only the leverage setting, with the same 0.5% maintenance rate:

The planned loss at the stop is $200 in every row, because the quantity and the stop distance did not change. What leverage changed is the collateral tied up and the distance to liquidation. At 2x and 10x the liquidation price sits well beyond the stop. At 25x it sits at about 3.5%, inside the 4% stop, so the exchange closes the position before the price ever reaches the stop level.

Leverage raises the planned loss at the stop only when the collateral it frees is used to open a larger quantity against the same stop. Gaps and fast markets are a separate matter: a stop is a price level, not a guaranteed fill, so the realized loss can exceed the planned amount at any setting.

Kresmion's position calculator lays these figures side by side. It sizes a position from an account size, a risk percentage and a stop, then shows the notional value, a leverage figure (notional divided by the account) and a margin estimate at the chosen leverage setting. Changing the leverage setting moves the margin estimate and leaves the size and the loss at the stop where they were. For a futures contract with a specification on file, it labels margin as set by the exchange rather than estimating it. It is a calculator only: it places no orders, lends nothing and holds no funds.

Isolated margin and cross margin

Crypto venues offer two ways of assigning collateral to a position.

• Isolated margin ring-fences a fixed amount for one position. The most that position can lose to liquidation is that amount, and the liquidation price is set by that margin alone, as in the tables above.
• Cross margin lets every open position draw on the account's shared free balance. The liquidation price sits further away, because more collateral stands behind the position, but a losing position can consume balance that was not assigned to it, and a liquidation can reach further into the account.

Futures margin: a performance bond

On a regulated futures exchange, margin is not a down payment and nothing is borrowed. The CFTC's glossary puts it directly: "The margin is not partial payment on a purchase. Also called Performance Bond." The exchange specifies initial and maintenance margin for each contract, and a futures commission merchant can require more than the exchange minimum. Positions are marked to the settlement price every session, with gains and losses moved in cash daily. When equity drops to or below maintenance, the call is to restore it to the initial level, not just to the maintenance line. The futures contract explainer walks through a crude oil example of that call.

Crypto perpetual contracts share that logic, margin as collateral against a derivative with nothing bought on credit, but enforce it by automated liquidation rather than a call. Spot margin trading on crypto venues is a different product: there the venue lends cash or coins and charges interest, much as a stock broker does.

Stock margin accounts: a real loan

A stock margin account works differently: the broker lends cash against the securities in the account, and charges interest on the loan. In the United States, two layers of rules set the minimums.

• Regulation T (Federal Reserve Board, 12 CFR 220.12) sets the initial requirement for a margin equity security at 50% of its current market value, or the percentage set by the regulatory authority where the trade occurs, whichever is greater.
• FINRA Rule 4210 sets a maintenance minimum of 25% of the current market value of margin securities held long, and a $2,000 minimum equity requirement. Firms are required to set their own house requirements and can go higher.

Worked example, illustrative: $10,000 of cash buys $20,000 of stock at the 50% initial level, with $10,000 borrowed. That is 2x leverage on the investor's equity. The loan stays at $10,000 while the stock moves, so equity is the stock's value minus $10,000. At the 25% maintenance minimum, equity equals 25% of the value when the stock is worth $13,333.33 (equity $3,333.33), a fall of one third. Under a 30% house requirement, the same point arrives at $14,285.71, a fall of about 28.6%. Below that line the broker issues a maintenance call, and it can sell securities, in some cases without waiting for the call to be met.

Where Kresmion shows leverage in the market

Kresmion does not lend on margin, run a liquidation engine or execute orders. It records the traces leverage leaves. For signed-in readers, the crypto derivatives page shows perpetual open interest by venue and in total, next to the funding rate and the long/short ratio, which together size how much leveraged exposure is open and which side pays to hold it. Open interest explains how that count is read, and the funding rate and long/short ratio covers the other two series. Kresmion also records realized liquidations from a single venue (OKX) across BTC, ETH, SOL, XRP and DOGE, a proxy for forced flow rather than a market-wide total.

Key takeaways

Frequently asked questions

What does 10x leverage mean?

It means the position's notional value is ten times the margin behind it: $1,000 of margin controls $10,000 of exposure. A 10% adverse move on that exposure is a $1,000 loss, the whole margin, and a venue liquidates slightly before that point, when equity reaches the maintenance margin.

What is the difference between initial margin and maintenance margin?

Initial margin is the collateral needed to open a position. Maintenance margin is the lower level the position's equity must stay above while it is open. Falling to or below maintenance brings a margin call from a broker, or a forced close from an exchange's risk engine.

Does higher leverage mean a bigger loss?

Not for a position of a fixed size. The loss at a stop depends on the quantity and the stop distance, so the same position carries the same planned loss at the stop at 2x or 25x. Higher leverage reduces the margin posted and brings the liquidation price closer, and at a high enough setting the liquidation price can sit inside the stop, so the position is closed before the stop is reached.

Is margin a loan?

It depends on the market. In a stock margin account the broker lends cash against the securities and charges interest. In futures, and in crypto perpetual contracts, margin is collateral held against a derivative position: nothing is borrowed, which is why the CFTC describes futures margin as a performance bond rather than partial payment. Crypto spot margin trading, by contrast, is an interest-bearing loan.

Does rising leverage in the market predict a price move?

No. Open interest and funding describe how much leveraged exposure is open and which side pays to hold it. They measure the size and cost of positioning at a moment, not the direction of the next move.

This page is information, not investment advice.

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Source: Regulation T, 12 CFR 220.12 (Federal Reserve Board; 50% initial margin for margin equity securities); FINRA Rule 4210 (25% maintenance for margin securities held long, $2,000 minimum equity, house requirements); CFTC glossary, "Margin" and "Margin Call". Kresmion position calculator (margin estimate at the chosen leverage; exchange-set futures margin not modelled). All worked examples use illustrative round numbers and an illustrative 0.5% maintenance rate, not live prices or venue settings.

Kresmion Research.