Equity minus used margin: the amount available to open new positions or to absorb losses on existing ones before a close-out becomes possible.
Most leveraged platforms show three numbers: equity, used margin, and free margin. Free margin is what stands between your open positions and a margin-call.
Example on a forex account: $10,000 equity, $8,000 of used margin, $2,000 free. If open positions lose $2,000, free margin hits zero and the platform starts warning; a further loss triggers automatic closure. Note that the loss required is only 20% of equity, because the positions are levered roughly 5:1 against the account.
The practical rule is to treat free margin as a hard floor, not a resource. Many traders run a minimum of 50% free margin, so that a normal bad day cannot escalate into forced closing at the low - which is how forced-liquidation usually destroys accounts that were merely wrong, not broke.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.
Educational only, not advice. Spotted an error? Post in Site Feedback.