A Different Perspective on Leverage Trading

Leverage trading is a type of investing in which an individual essentially borrows money from a broker in order to secure a larger position in a financial market. While most of the experts would argue that leverage is extremely dangerous, there are also several advantages of using leverage in your trading. Here are a few things to consider about leverage and how it can work both ways.

Risks of Leverage

Before you get involved with leverage, it is important to understand the risks that are associated with it. When you are borrowing money from a broker, you are taking a bigger position of risk. If the trade goes against you, you will not only stand to lose the amount of money that you originally invested. You will also have to pay back the broker the amount that was lost.

For example, a regular stock market account offers you a 1:1 margin. This means that if you invest $5000, your broker will also give you another $5000 to invest. If you lose all of the money in your account, you will actually end up losing $5000 and you will owe the broker $5000. This can be very difficult to deal with if you do not have the money.

Amplify Gains

Even though leverage trading can be a little bit dangerous, it is possible that it will work in your favor. If you know what you are doing and you know how to pick a winner, you can make much more money. Leverage trading makes it possible to amplify your gains when you enter a position. For example, let's say that you had $5000 to invest in stocks. You buy 500 shares of stock at $10 per share. If the price doubles, you have just made $5000 in profit and your account will be worth $10,000.

If you use leverage and the broker gives you another $5000 to invest, you are starting out with $10,000 in your account. You can then buy 1000 shares of the same stock. When the stock doubles in value, your account will now be worth $20,000. When you pay back the broker the $5000, you will have $15,000 in your account. This means that you have tripled your money just by using leverage.

Access Inaccessible Markets

Another big benefit of using leverage is that it allows you to gain access to otherwise inaccessible markets. For example, this is commonly done in the Forex market. The Forex market was originally a place for institutional investors only. You had to have millions of dollars in order to invest. Now Forex brokers regularly offer leverage of 200:1, or in some cases 500:1. This allows you to get involved with the market when you would normally have to sit on the sidelines. When the exchange rate between two currencies fluctuates, it does not take much movement for you to make a nice profit.