
Rather than depositing the full value of his investment, a participant to the market can deposit only a fraction of such value: the initial margin. The minimum requirements are set by the exchange and / or the broker, and can be 7 % or less of the value of the investment (contract).
The ratio of the initial deposit divided by value of the contract is called the margin, and the inverse of the margin is called the leverage. To illustrate, assuming a 7 % margin, a contract valued at USD 40,000 can be traded by depositing only USD 2,800, in which case the leverage would be (1/.07) 14.28.
Trading without margin would imply matching the value of the investment dollar for dollar, which means depositing USD 40,000 for an investment (contract) valued at USD 40,000. The higher the leverage, the higher the risk as well as the reward.
