The leverage in trading means trading with more money than the trader actually has.
To do this, the broker gives a temporary loan that allows you to do trading with bigger positions that you have in your account. It is applied in multiples of the capital invested, for example, 2x, 3x, etc., and the broker pays that money to the investor at a ratio fixed.
It should be noted that the leverage can be applied to both positions of buying and selling, and that, for the same leverage, both the losses and the winnings are multiplied accordingly. Therefore, it is a double-edged sword, since that is a multiplier of risk.
For example: If the leverage offered by the broker is 300:1, to open a position of $30,000, you’d have to use $100 of your trading account as: $100 x 300 = $30.000. If you want to buy 100 shares of X company to 30U$S, the broker will be charged 3000U$S. If you don’t have 3000U$S in the account you can’t buy the 100 shares, then there’s no leverage.
If you want to buy 100 CFDS (by way of example) of X company to 30U$S, you pay to your broker only 5% (by way of example, is usually between 1% and 10% of the total ) 3000U$S. that Is to say, you only need to have 150U$S and give them to your broker to “move” the equivalent to 3000U$S of X company. Situation 1: advantage If you win a 10%, you don’t feel like 15U$S (10% of 150U$S), but wanting to 300U$S (which is 10% of 3000U$S). Situation 2: a disadvantage If you lose 10%, you don’t lose 15U$S, but you lose 300U$S, but not paid to the broker.
If you don’t have enough in the account to cover the loss, before that happens, the broker will deliver you out of the market call and you will be left with the account to zero.
The broker never loses by irresponsibility that one can have or make bad trades. Margin is The money needed to carry out an operation leveraged.
The margin is expressed by a percentage relative to the total amount of the position is leveraged. With respect to the first example for leverage of 300:1, the margin is equal to 0,3333% (1/300). If the total amount of the position leveraged is of $30,000, the margin used is equal to $30,000 x 0,3333% = $100 (it would be 99,99999 what we round to didactic purposes). The majority of the financial derivatives are leveraged products.
That’s why before you continue with every product, we want you to understand the concept of leverage. Later, we will see with greater detail and explain how to avoid the losses that cannot be assumed and how to take advantage of the benefits of leverage.