Leverage is famously known as borrowed money from brokers to increase their clients' capacity in trading. Wouldn't it do more harm than good if brokers continue to give such support?
Do you ever find yourself in a situation where you wish you had more money? Don't we all! This is the story of so many traders who wish they could invest more into their trading accounts so they have a better chance of turning over a good profit.
This is where leverage comes in.
Leverage is basically borrowed money. A broker allows you to use borrowed money on top of your own capital for trading. The higher the leverage, the more money you would've borrowed which would increase your chances of making bigger profits but also increase your chances of making a loss. If your own investment is $100 and the leverage on your account is 100:1, you essentially have $10,000 ($100x100) to use in your trading account.
Benefits of Leverage to Brokers
Now you may be wondering, why would a broker offer you capital out of their own pockets? It doesn't make sense right? Well, brokers know that they need to give their clients an incentive to trade with them. A trader who isn't offered leverage and only has a small amount of capital is less likely to put that into trading since they can't risk what they can't afford. However, if they are offered leverage with their trading account, they are more likely to open a trading account with that broker. At the end of the day, as long as a trader opens an account and starts trading in it, that is all that matters to a broker. They earn their profits through each position the trader opens.
Benefits of Leverage to Traders
This one is pretty obvious. The biggest benefit to a trader if they open a trading account that has leverage is they'll have access to more funds to trade. This means they'll be able to open more deals and use a bigger lot size than they would've been able to without leverage. An account with $100 without leverage has fewer chances of making big profits than an account with $100 with leverage. This is because the $100 account with leverage actually has more than just $100. If the leverage on that account is 100:1, the account actually has $10,000 available for trading. This is why traders prefer opening a trading account that offers leverage.
Risks of Leverage
Now if you think leverage seems too good to be true, well it actually is. There is more to it than just borrowed money and more chances of bigger profits. It is important to know that although higher leverage brings opportunities for bigger profits, it also brings opportunities for quicker losses. This is because since the margin is getting smaller, there are more chances of losing when the price moves against you.
It is therefore always recommended to be very frugal when it comes to choosing leverage for your account. You may be drawn toward the biggest leverage offering available but it's a trap. It is always best to stay around the lowest leverage offered which is still quite a big amount. That is usually 100:1 and 200:1. Trading accounts perform the best in these conditions.
10 Comments
May 31 2022
When used properly, leverage can be helpful to traders, but we must never forget to exercise caution when doing so.
This post is extremely helpful for new traders who will use leverage, and it is written with the intention of preventing traders from being seduced by large leverage offers.
Traders that are interested in experimenting with leverage might wish to begin with the lowest leverage offer.
Jan 10 2023
Jan 10 2023
Aug 23 2022
Because leverage can lead to financial ruin for traders, you should approach it with extreme caution and skepticism. Large leverage may also be utilized for the sole purpose of luring traders in.
Jan 10 2023
Jan 10 2023
Aug 23 2022
When you use leverage, it signifies that you are already in the position of having taken out a debt. The higher the leverage, the more money you will borrow, which will enhance the likelihood that you will make larger profits, but it will also increase the likelihood that you will suffer losses.
Jan 10 2023
Werner: I disagree. I think leverage is borrowed money, not debt. For example, if I wanted to sell clothes, I needed more money and my friend lent me the money. But in terms,my friend need to know my funds. He give me term, if my money drop bellow $5, my friend will take over the products that I sell. And sell them with loss of course, the money that generate by selling will become my friend. In other words, you borrowed $10 and $5 of your own money, provided that your money is not equal to $10. When your balance reaches $10, your friend takes the money and forces you to sell all your clothes. So, assuming one outfit is $7.50, you can buy two outfits. You sold two pieces of clothing for $10 each. You have won a prize of $5. So your total balance is $20 and you started buying and selling more clothes for $20 of your money. And at the end of the day, you just give your friend $10 back. What should I do if I lose? My friend will get his $10 back and will love the terms he gave. You have to sell all your clothes to no avail. That's leverage, and with this system you don't owe the broker, except that the broker doesn't have a negative balance policy.
Oct 19 2022
Oct 19 2022