Why Do Brokers Give Leverage?

By Alyaziah Hayat
Published: May 5, 2022
Last Updated: Apr 2, 2023

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.

Why brokers give leverage

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.

Alyaziah Hayat

I've been writing as a hobby for about 10 years but I just started doing it professionally. I've been forex trading for about 2 years now mainly focusing on XAU/USD but I also deal with the main currencies when the market is positive. I've also dealt with different brokers and trade using MetaTrader 4.

10 Comments

Ita Nimah

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.

Lydia

Jan 10 2023

Ita Nimah: "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." Ok, first of all, I'm a little confused here. In this article, it has discussed the advantages of leverage with a broker. They can give traders more incentive to trade in order to boost their profit. What is the relationship between leverage and broker profits? Second, the article states that the higher the leverage, the higher the profit and risk. I completely understand that, but what confuses me is the greater leverage you mentioned. What are the disadvantages of high leverage?

Aaron

Jan 10 2023

Lydia: Excuse me, let me get you an answer. First, the leverage connection with the broker's profit is simple. As you have said and the article has said, the more trading position that the trader can open. As you see, if the trader only have $10 for example, the trading position that they can open with standard account is 0 position. It means they can't used the $10 to open position. How about the broker give them leverage 1:100, which boost their power buying from $10 become $1,000. The result is the trader can open position. If they open trading position for once, the spread will be charged into the trader by broker. And for every trading size that reach 1 lot, the brokers charge with commision. It means the more you trade, more spread will be charged. And if the trading size reach 1 lot, brokers will charge you additional fees in commision. The secon about the risk of leverage. The more power buying that you can get, more you will become greedy, resulting overtrading and make you bankrupt. that;s the backdrawn of Leverage. Hope you can understand about the leverage. Thank You!

Daniel

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.

Keisha

Jan 10 2023

Daniel: I agree! There is some misunderstanding about the higher leverage with higher profit. I think it is just the marketing for brokers to get new trader to start trading with them. Of course the fees will be charged based in entry each position. Because of that, I hate brokers that give large leverage such as 1:1000 and above. It is just a trap for who doesn't wise enough to use leverage. I Prefer to use max leverage that I can have is 1:200. Above that, I think twice to use it

Beverly

Jan 10 2023

Keisha: The main disadvantage of leverage is the power purchase itself, right? The more you can open a trade, the closer you get to a margin call, right? Traders often overtrade or open more positions believing that they can always open more positions to make a profit. You might even try to cut your losses with, right? Leverage really is a double-edged sword. This can be profitable, but a setback if unwise.

Werner

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.

Martin

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.

Larry

Oct 19 2022

So, in general, leverage can be the most potent weapon for increasing profit while also increasing loss. I have some question.

Is there any suggestion to start trading with a lower amount than the article suggests?

Because most brokers provide leverage ranging from 1:100 to 1:10.000, I recognize that increasing my leverage increases my risk of losing more money.

And will starting with lower leverage reduce my capacity to gain?

Justin

Oct 19 2022

Larry:

I advise you to recalculate your capital before engaging in forex trading since if you don't do so, you'll lose more money than you make. You must first determine your capacity for surviving floating loss.

The article say that leverage is only a broker tool that enables us as traders to engage in more trading without spending a lot of money.

Of fact, the broker will benefit even more when we trade more. Therefore, a trader who opens more positions in the market generally makes money for the broker.

Second, about the profit. I say yes leverage is included if you mean that you make more money by opening more positions.

Greater ratio leverage also results in higher levels of buying.

However, if you mean a greater profit with just one open position, it is not!

For instance, if A opens a buy/sell position with 0.01 lot and gains $1 when the price rises by 50 points, B opens a position with the same number and 0.01 lot as A but only gains $0.1. What makes a different in that situation is contract size.

Contract size always being ask when you make account to trading. Ex : standard, micro, cent and etc.

I advise you to start with capital that is at least 1% off of leverage. For instance, if you want to use 1:100, you must first add at least $1. Adding more is preferable.

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