What you will learn
- Track cash collateral separately from notional exposure.
- Recognize margin calls and losses beyond an initial deposit.
Margin
Initial margin is required to open a position, and maintenance margin is the minimum account equity needed to keep it open. Futures add variation margin, which settles gains and losses daily. For securities, margin financing lets a broker lend part of the purchase cost, with the holdings as collateral and interest charged.
If account equity falls below the maintenance level, the broker issues a margin call to add funds or cut exposure, and may liquidate positions without waiting. Because losses are not limited to the margin posted, a position can lose more than the deposit.
Leverage
Leverage is often stated as position value divided by your own capital, so 5x means HK$5 of exposure per HK$1 of capital. It can come from margin loans, futures, options or corporate borrowing. Before costs, the percentage gain or loss on your capital is roughly the leverage multiple times the asset's percentage move.
Because losses scale the same way, a modest adverse move can eliminate all the capital: at 5x, a 20% fall does it, and at 10x a 10% fall. Interest, margin calls and forced selling can turn a temporary decline into a permanent loss. Leverage does not create returns; it changes risk.
Position Sizing
Under fixed-fractional sizing, quantity = (account equity × risk percentage) ÷ (entry price − stop price). The planned loss per unit is set by where the exit would sit, so a wider stop produces a smaller position and a tighter one a larger position. The result is rounded down to the instrument's tradable lot size.
Sizing controls how much a single idea can hurt the account, but total risk also depends on how many positions are open and how correlated they are. Several small risks that move together can behave like one large risk.
Worked example: A margin shortfall is a cash problem
Illustrative: a position starts with HK$10,000 of margin. An adverse move produces a HK$3,000 mark-to-market loss, leaving HK$7,000 of margin equity. If the maintenance requirement is HK$8,000, the account is below it. The amount and timing of additional funding or liquidation depend on broker and contract rules; losses can continue beyond the original deposit.
Check your understanding
HK$50,000 of capital supports HK$200,000 notional exposure. What is the simple gross leverage, and what does a 5% adverse exposure move imply before other effects?
Show answer and explanation
Gross leverage is 200,000 ÷ 50,000 = 4 times. A 5% move on exposure is HK$10,000, or 20% of starting capital. Funding costs, nonlinear exposure and liquidation can alter the result.