Margin to Equity Ratio

adast027's picture
Rank: Baboon | 132

Hi - I'm just trying to understand margin to equity ratio and please bear with me, but if anyone can help it would be appreciate.

I understand how it's calculated - nominal trading level / margin, so if an account is $1m and 250k is required then this M/E ratio is 25%.

However, what I'm trying to understand is how the lower the ratio it's considered less risky. I can understand that it makes a trader more efficient if they're using less cash if their margin to equity ratio is say 5% but doesn't this mean that they're just more levered up?

If the margin to equity ration is 5% doesn't this mean they're using 20x leverage and if it's 50% then they're using 2x leverage?

The more leverage up you are shouldn't this be riskier?

I'm assuming that what I'm mistaking here is that margin and leverage are not the same thing?

Sorry if this question seems very basic.