Margin and Leverage
Leverage amplifies gains and losses; margin is the collateral mechanism that enforces survival constraints.
Leverage increases exposure relative to equity; small moves can wipe out capital.
Margin calls force deleveraging when losses occur or requirements rise.
In stress, margin and liquidity interact: forced selling can create feedback loops.
Leverage scales your exposure relative to equity. A given price move hits leveraged equity harder, and margin requirements enforce a minimum equity ratio relative to exposure.
For a fixed price shock, higher leverage makes equity more volatile: equity moves in percentage terms roughly by leverage × shock. Once the equity ratio drops below the margin requirement, the position must be reduced or capital added.
Margin is a survival constraint: it enforces a floor on equity relative to exposure. In stress, falling prices, rising margins and poor liquidity can combine into forced deleveraging and feedback loops.