1
Gross exposure
The market value controlled by the position.
Lesson · Trading Risk Management
Leverage and Margin Risk
Compute how far a price move reaches account equity through leverage, check a position against a maintenance requirement, and say why buying power is not a risk limit.
Core concepts
What to understand
Keep the process direct: define the risk, calculate it, and enforce the limit.
2
Effective leverage
Gross exposure divided by account equity.
3
Margin risk
The broker may require additional equity or liquidate positions when requirements are not met.
Interactive lab
Change the risk conditions
Adjust the controls and read the market behavior and account impact after each change.
Leverage and Margin Risk Lab
Synthetic educational data · no live market connection
RISK MODEL
Risk process
Apply it in order
Risk calculations should happen before the order is submitted.
Calculate exposure
Measure the full notional position, not only cash deposited.
Stress adverse movement
Translate a realistic price shock into account-equity loss.
Keep a margin buffer
Broker requirements can change and losses can exceed deposited funds in some products.
Knowledge check
Check your understanding
Select one answer for each question. Feedback appears immediately.
1. Buying power should be treated as:
Maximum permitted exposure is not the same as prudent account risk.
2. At 4× leverage, a 5% adverse move creates approximately what equity change before costs?
Four times exposure magnifies the 5% position loss to roughly 20% of equity.
3. Can a broker liquidate positions to meet margin requirements?
Margin agreements and rules may permit forced liquidation, sometimes without advance notice.
4. Equity $25,000 at 4× leverage ($100,000 position). Price falls 15% and the maintenance requirement is 30%. Equity afterwards, and the margin position?
Loss = $100,000 × 15% = $15,000, so equity is $10,000 (−60%). The position is now worth $85,000 and requires $25,500 at 30%; the account is $15,500 short and faces a call or liquidation.
Practical rules
- Measure leverage from total notional exposure.
- Maintain equity above broker and personal buffers.
- Stress-test gaps before using leverage.
Common mistakes
- Sizing from maximum buying power.
- Assuming a margin call provides guaranteed time to deposit funds.
- Ignoring interest and forced-liquidation risk.
References
Official reading
The labs use simplified synthetic examples. These sources cover the underlying risk and execution concepts.
FINRA · Margin Disclosure Statement
Official disclosure of margin losses and forced-liquidation risks.
FINRA · Brokerage Accounts
Overview of margin accounts and the possibility of losses beyond deposited funds.