Leverage is the mechanism that allows an entity to buy or sell financial assets for an amount greater than the capital held and therefore to obtain much higher profits. Of course, as in the positive case, you earn a lot, but in the case of loss, that is huge. Care must therefore be taken to use such mechanisms, which are common especially in the forex market.
In the most intuitive example, let's assume that we have 100 € available to invest in a security, but we decided to borrow another 900 €, because the deal looks really promising. The commercial leverage in this case is 10 to 1: if we were right and the share price rises by 40%, we will get 1400 € from which to subtract the 900 € to be returned with a gain of 400 € on an initial capital of 100 €.
The potential of using this function is intuitive, the risk is that the multiplier effect of leverage is naturally activated even if it is not; to return to our example, we would only have EURÂ 600 in our pockets, not only have we lost our hundred, but we would have to pay back another EURÂ 300.
The entities that use this type of leverage most of all are banks. This is because, of course, the banks in the economy have much higher capital. Moreover, the bank has the power to manage debt through securitization, so it certainly has much more room for maneuver than a single investor.
Through the leverage effect, therefore, it becomes possible to buy or sell financial assets for an amount greater than the capital you own and enjoy an additional profit compared to what you would get from a mere direct investment. The operation of the lever, as explained above, is intuitive. Leverage is very high especially in the Forex market. That would immediately lead us to start from there. But be careful: if we imagine that we are acting with a very high operating leverage, 1 to 400 for example, not uncommon in this type of market, with a capital of 100 €, would move 40,000 euros. Imagine profit but also losses.
When we act in the forex market, i.e. in the currency exchange market, the principle of leverage moves in parallel with the principle of margin. There are a great many risks, but the mechanism continues to last, why? Soon said. In the forex market, fluctuations are daily, without the incentive of the levers, it would be difficult to attract so many investments.
Let's start from a concept that, as we have seen in our previous interventions, is the basis of the forex market and therefore the basis of possible and substantial gains (but also of considerable losses). The leverage effect is specifically expressed through the operation of the reference market, fully influencing some of its decisive elements. In principle, it represents the possibility of making buy/sell actions for a certain amount of currency, exploiting only part of the total amount due. The general leverage effect is calculated with a given multiplier that applies to the value of the currency purchased.
In this case, therefore, we must necessarily consider possible multiplications of losses or gains (100 or 1000 euros a day ago the same), all based on the wind that pulls in the market compared to the forecasts made upstream (hence the importance of studying in depth the various trends and various contingent market situations).
Do not be fooled by those who talk about financial leverage in an absolutist positive or negative way; much depends on what position the supporter of the thesis in question takes in a subjective way. From our point of view, however, it is only and exclusively a factor that lies at the heart of this market; a factor that must be studied thoroughly in order to try to make the best possible profit from our investments.
For example, we could say that one of the possible advantages (due to the leverage effect), could be to diversify its investments constantly, deciding to use only a part of its capital in a specific operation, trying not to focus everything for everything on a single "horse".
Leverage is something absolutely legal, but it should certainly be better regulated than it is, to prevent unwary investors from falling on the sidelines because of excessive confidence in their own abilities, if not out of unconsciousness.
The advice is to always behave as when you act in the stock exchange. The fact of having a counter online and acting directly from the PC, undoubtedly produces an alienating effect, in which you are not always winning or losing money. Yet it is so, with one click too many, or an unwise decision, the counter can end up, not in the worst case, at zero.
If the losses then exceed what is owned, there is a risk of serious trouble. So be careful, especially at the beginning, be careful. One of the tricks, at least at the beginning, is not to overload your account, even if you have a lot of money. In addition, there are a lot of online platforms that offer the possibility to try demo accounts. They are both accounts in which you will have 40,000 and others with just 500. Try them both. The large accounts last longer but do not help you to perceive small figures and small investments. Conversely, with a small account, you'll have little room for maneuver and risk running out of it after a few operations.
When traders invest with trading on various financial markets, and need more liquidity than they really have, they use leverage.
The broker allows you to use so-called leverage to ensure that any losses on certain financial transactions are hedged. He then asks the trader for a deposit or margin requirement, i.e. a part of the price of the assets that he intends to buy. The broker for some types of assets makes a contract with the investor with fixed margin, for other types, instead the margin is calculated in percentage.
In online trading, during the investment phases, you can incur very fruitful results, but there is also the possibility that you will encounter quite dangerous risks, of losing a sum of money greater than your availability.
Each investor has a portfolio, if there is a possibility of incurring losses on the portfolio due to changes in price volatility, in jargon are called risk factors or volatility, are determined by changes in equity prices, interest rates, foreign exchange rates and prices.
Many trading experts advise against using leverage, especially for inexperienced investors, who target their interests on equities, binary options and ETFs. Leveraged operations are carried out with money borrowed from you, which can turn into gains, but in the same way into large losses.
The only market where leverage has been widely spread is Forex, where it is among the highest compared to other markets. Traders use it to earn money on exchange rate variations between two currencies.
After years of trading, experienced investors can understand the mechanism and use of leverage and know that they should not use it on securities that have a high volatility if not using stop-losses that limit the risk of losses.
In order not to run the risk that losses will quickly zero your liquidity, you should not open too many large positions or positions in relation to your account.
We remind you however that it is very important to study every instrument and every graphic that you have available with great attention (doing experiments on demo accounts). Open an account and try it only when you are certain and prepared
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