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As a novice investor, I am still struggling to understand some of the mechanics involved in leveraged positions.

When I take a long position with a leverage of 1.5 over several month, is the interest I owe to the broker just accumulated over that period? Or do brokers liquidate positions at regular intervals to cover interest?

  • I doubt that any broker would liquidate positions just to cover interest. At worst they'd pull from a margin account or something similar; most likely the interest would just accrue and be paid when the "loan" is repaid. – D Stanley Apr 26 '17 at 20:41
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I think to some extent you may be confusing the terms margin and leverage.

From Investopedia

Two concepts that are important to traders are margin and leverage. Margin is a loan extended by your broker that allows you to leverage the funds and securities in your account to enter larger trades. In order to use margin, you must open and be approved for a margin account. The loan is collateralized by the securities and cash in your margin account. The borrowed money doesn't come free, however; it has to be paid back with interest. If you are a day trader or scalper this may not be a concern; but if you are a swing trader, you can expect to pay between 5 and 10% interest on the borrowed money, or margin.

Going hand-in-hand with margin is leverage; you use margin to create leverage. Leverage is the increased buying power that is available to margin account holders. Essentially, leverage allows you to pay less than full price for a trade, giving you the ability to enter larger positions than would be possible with your account funds alone. Leverage is expressed as a ratio. A 2:1 leverage, for example, means that you would be able to hold a position that is twice the value of your trading account. If you had $25,000 in your trading account with 2:1 leverage, you would be able to purchase $50,000 worth of stock.

Margin refers to essentially buying with borrowed money. This must be paid back, with interest. You also may have a "margin call" forcing you to liquidate assets if you go beyond your margin limits.

Leverage can be achieved in a number of ways when investing, one of which is investing with a margin account.

  • Also I should probably mention that I didn't address your question about positions being liquidated to cover accrued interest as you would most likely have to check with the brokerage who offered you the margin account. Rules and laws obviously vary from brokerage to brokerage and country to country. – Keith Apr 26 '17 at 20:39
  • Typically, liquidation will occur on the broker's published schedule any time the account's reserve fails to meet the margin requirements, regardless of what caused that to happen. This is computed as the account's value (assets minus liabilities) compared to the total amount borrowed. – David Schwartz Apr 26 '17 at 20:53
  • @DavidSchwartz I would assume that is the case with most brokerages; you have to stay within your margin limits or risk a margin call. – Keith Apr 26 '17 at 21:00
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    @user1934212 I'd definitely read the fine print of your agreement with the brokerage, some may require interest payments or increased collateral at regular intervals. But, generally speaking, yes that is the way it works. – Keith Apr 26 '17 at 21:13
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    @user1934212 Typically, yes. But note that debt directly reduces the reserve that keeps you inside your margin. – David Schwartz Apr 26 '17 at 23:32

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