Everything You Need To Know About Leverage
Leverage is the ability to control or manage a large amount of money using a small amount of money you have on your own. In financial terms, this is known as Other People's Money (OPM).
An example of proper leverage in the workplace is when an invеѕtоr borrows money to be invested in shares. Say, ACME shares are trading at $100 and you have $10,000, no leverage; The maximum number of shares you can buy is 100. If the stock increases to $200 and you decide to exit, your profit is $10,000.
However, if you come to the bank and borrow another $10,000 and use it to buy shares, now you can buy 200 shares. When the share price doubles, your total profit becomes $40,000. After returning the loan funds to the bank, your profit becomes $20,000 less bank interest.
When lеvеrаgе еѕuа hope, lеvеrаgе is very useful for traders and investors. If it fails, losses can exceed the investor's initial capital which causes negative flashes. In the example above, if the stock falls to zero, first the inverter will suffer a personal loss of $10,000. Next, the investor must return the $10,000 more to pay it back to the bank.
Financial Leverage
In Forex and the CFD Industry, the leverage concept works in a similar way to borrowing money to buy stocks. Online brokers provide virtual credit known as leverage to their customers. This virtual credit is usually guaranteed with a subscriber deposit. This allows customers to trade more financial assets.
It is not possible to separate between leverage control in trading and margin contact. Margin is the amount of money a trader needs in order for him to be able to use leverage. Margin is in good faith which brokers need before they can provide credit to traders. Margins are expressed as a percentage. If the broker requires a margin of 2%, you have a leverage of 1:5 and if the broker requires a margin of 0.25%, you have a leverage of 400:1.
As an example. If a trader has $1,000 in the account and is using a 1:5 leverage ratio, this means that the trader can buy an asset equal to $5,000. If the trader has 100:1 leverage, that means he can buy $100,000 worth of assets.
The amount of leverage offered by the broker is subject to regulatory guidelines. In the EU for example, regulatory guidelines limit this leverage to 30:1. In the US, Financial Industry Regulatory Authority (FINRA) requires brokers to only offer loans to accounts with a minimum of $2,000.
Take advantage of the advantages
Using leverage can be profitable from three sides. First, leverage can help traders maximize the profit per trade which you will see in the example below. Second, leveraged traders with limited financial resources can trade expensive assets such as Btсоіn, еmаѕ, and latіnum. Without leverage, it is not possible for a trader with an account balance of $1,000 to trade gold, which is currently trading at a price of $1,200.
But the leverage that traders use is very important in determining success. When trades are going well, traders with high levels can earn more money than regular traders.
For example, you have $1,000 in your account, and you decide to sell USD/JPY shares which are traded at 110. Your account has over 50 1% and the broker requires a deposit. In addition, assume that the standard lot is worth $5. For five standard lot sizes, it's $25.
In this trade, you will sell USD/JPY for $50,000. Using the general above, if the USD/JPY pair moves below 100 yen, your profit or profit will be $2,500 (100 x 25).
On the other hand, if you decide to use leverage 10, you will have a total trading capital of $10,000. If your profit is 100 yen, your total profit will be $250.