The unit for trading stock indices is an index. Each stock index will also have its own currency depending on its country. Below we see the currency associated with each of the major indices.
So if we are buying or selling a US index it will be priced in US Dollars. The FTSE will be priced in Pound Sterling. The CAC and DAX will be priced in Euro. And the NIKKEI will be priced in Japanese Yen.
So as we should know by now when we are buying and selling instruments using leverage we do not need the full amount of the position in our balance. Instead we only require a portion of the total value known as the margin requirement i.e. the amount we put down so we can open the full position size.
Let’s take an example using the S&P 500.
So say we want to buy just 1 index of the S&P. The current price is 1645.75. So without leverage we would have to pay $1,645.75to open this position. However, say we have access to 200:1 leverage on the S&P that means we only need 0.5% of this. So in this case our margin requirement will be just $8.23.
|Trade Size||1 Index|
|Current Market Price||$1,645.75|
|Cost of Trade without Leverage||$1,645.75|
|Margin Requirements (Leverage)||0.5% (200:1)|
|Used Margin for Trade||$8.23|
If we had a trading account in a different currency denomination then this $8.23 would be converted to our currency at the current exchange rate.
Let’s look at another example taking the DAX 30.
Say we wanted to short sell 10 indexes of the DAX as we believe German equities will fall in value. The current price is €8,549.50.So without leverage the price of this position would be €85,495.00. But if our broker offers us leverage of 50:1 on the DAX we only need to put down 2% of that as a margin requirement to open the position.
Therefore, for a position of 10 indexes we only require a margin of €1,709.90.
|Trade Size||10 Indexes|
|Current Market Price||€8,549.50|
|Cost of Trade without Leverage||€85,495.00|
|Margin Requirement (Leverage)||2% (50:1)|
|Used Margin for Trade||€1,709.90|
Again, if we had a trading account in a different currency denomination then this $51.91 would be converted to our currency at the current exchange rate.