What Is Leverage
When trading CFDs, you trade with leverage. While using leverage, you only need to place a fraction of the required capital to make your trade. Here’s how it works.
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Leveraged trading can be advantageous for traders as it can really allow you to boost your profits. When you trade with leverage, you are essentially borrowing money from your broker. That is, you will be required to deposit only a small portion of the trading capital necessary to maintain your market position, and your broker will then cover the remaining cost. With leveraged trading, you are able to trade larger market positions. This could mean greater profits.
Let us look at leveraged trading in more detail. Margin is the funds you need to deposit into your account to maintain your positions with a leveraged account. Margin is often represented as a percentage. Let us look at an example. If your broker is offering an account with a margin of 10% and you want to buy 100 shares of a stock valued at $20 each, then you would only have to deposit $200 in order to control the position. If you decided not to use leverage, you would need to deposit $2,000 to maintain a market position of that same size.
While leverage has many benefits, you need to understand that your losses can also be magnified. For example, in the example above, if the market appreciates to $25 per share, the value of the market position would increase to $5,000. This would mean you would have gained $3,000 which would be 15 times your initial deposit. On the flip side, if the market drops to $15 per share, you would have lost $3,000 in value. This means that in the end, you would have lost more money than you had originally invested.
With all this in mind, take the time to understand leverage as well and the benefits and the disadvantages and then join the BvisionFx trading family to gain direct access to the financial and digital markets.