What is leverage?
We will give you some examples:
Jack has decided to open a CFD position and invest $100 in stocks of Company 1 expecting them to grow in price. Jack uses leverage x1 which means that his profit will increase by 1%, if the stock price grows by 1%. So, if his prediction’s right, Jack will gain $1.
Having the same amount of money $100 Robert decides to use leverage x10. In this case, if the price grows by 1%, Robert's profit will increase by 10% and will result in $10. But what if the price goes in the wrong direction? In this case, the losses will multiply accordingly, which you will never lose an amount larger than your original investment.
On our platform on both demo and real version leverage is located in the right menu, just below the amount settings.
Note that leverage made differ depending on a broker, a type of an asset and the time of the trading operation.
Popularity of this kind of trading is explained by the availability of a great deal of advantages for traders:
- Minimization of invested capital
It is not necessary to pay full sum of money for a deal. One can pay only a small part of it.
For example, when opening a $3000 deal with leverage level equal 1:400, it is necessary to invest only $7.5 from own funds.
- Availability of instruments
If trading with some instruments is possible only in case of possessing a small startup capital, investments in more prestigious assets cost not small money.
With the help of leverage level such investments become more available: now it is not necessary to enter these assets' market, it is only sufficient to play on rates' difference securing yourself in leverage level.
- Big responsibility concerning risks
With the help of margin trading it is possible to enter the market with a small capital, however, there is also some risk: the more you are able to earn on a transaction, the more you can lose, if a transaction turns out to be unsuccessful.
Trading with leverage level, develops a trader consistently reminding him about risks, so, it will be much quicker to learn working with stop-losses to escape big losses.
For leverage trading it is necessary to possess a definite sum of money in an account to cover possible losses. Every broker has its own requirements to such a sum.
*Leverage trading (margin trading) is a system giving an opportunity to conclude transactions in the cases when its sum multiply exceeds a trader's total capital. So, a trader invests in a deal only a small percentage of funds; exact value of this percentage depends on many factors such as a broker, a platform and an asset. Nowadays, margin trading system is very popular. Leverage level, as a rule, means ratio of a trader's own funds to a total sum, and margin is the same ratio expressed in percentage. As leverage poses serious risks for traders, especially in periods of high volatility, it should be used for the tension and caution.