When you open a trading platform, you will usually see several numbers at the top of the screen: balance, equity, margin, free margin and margin level. Beginners often focus on the balance, because it looks like the money in the account. In fact, equity is the number that tells you what your account is really worth at this moment, and it is the one your broker watches most closely. Understanding the difference is one of the simplest ways to avoid nasty surprises.
What the balance shows
Your balance is the money in your account based on closed trades. It starts with your deposits, adds any realised profits, subtracts any realised losses and adjusts for charges such as overnight financing and commissions. The balance only changes when a trade is closed, a fee is charged or money moves in or out.
That means the balance can look perfectly healthy while your open positions are deep in the red. It is a record of what has already happened, not a live view of where you stand.
What equity shows
Equity is your balance plus or minus the profit or loss on all open positions. If your balance is £5,000 and your open trades are showing a combined loss of £800, your equity is £4,200. If they are showing a profit of £300, your equity is £5,300.
Equity changes with every tick of the market. It is what you would have if you closed everything right now, before any further costs. That is why it is the number that matters for risk.
Margin, free margin and margin level
When you open a leveraged position, the broker sets aside part of your funds as margin, a deposit that supports the trade. Our guide to leverage in trading explains how this works.
Free margin is your equity minus the margin already in use. It is the money available to open new positions or absorb further losses. Margin level is usually shown as a percentage, calculated as equity divided by used margin, multiplied by 100. A margin level of 300% means your equity is three times the margin required for your open trades.
Why equity is the number to watch
Brokers use equity, not balance, to decide whether your account can keep supporting its positions. As losses grow, equity falls, free margin shrinks and the margin level drops. If it falls far enough, you may receive a margin call, and if it keeps falling, positions may be closed automatically.
For retail clients in the UK, FCA rules require CFD providers to begin closing positions when account equity falls to half of the margin needed to keep them open. Retail clients also benefit from negative balance protection, which means you cannot lose more than the money in your account on those products. These protections are valuable, but they are a last line of defence, not a risk management plan.
A worked example
Suppose you deposit £2,000 and open a position that requires £500 of margin. Your balance is £2,000, your equity is £2,000, your free margin is £1,500 and your margin level is 400%. The market moves against you and the position shows a £900 loss. Your balance still reads £2,000, but your equity is now £1,100, your free margin is £600 and your margin level is 220%. Nothing has been realised yet, but your account has lost almost half its value.
If you only looked at the balance, you might think nothing had changed. That is exactly the trap.
Common beginner mistakes
The first mistake is judging performance on the balance alone while ignoring large open losses. The second is using free margin as a signal to open more trades, when it simply shows how much more risk the account can technically hold. The third is ignoring overnight financing, which quietly reduces the balance on positions held for days or weeks. The fourth is sizing trades so that the margin level sits close to the danger zone in normal conditions, leaving no buffer for volatility. Our guide to position sizing explains a more sensible approach.
Bringing it together
Balance tells you what has happened. Equity tells you where you stand now. Watch equity, keep plenty of free margin and size positions so the broker’s safety net never comes into play.
If you would like to check how ready you are to manage leverage and risk with real money, our free trader assessment offers an honest starting point.
