Forex, online and CFD trading can seem like it’s all wrapped up in complicated lingo, andif you aren’t familiar with the industry terms it can feel like you have no idea what everyone around you is on about – and it can leave you feeling left out.
Leverage is one of the most important industry terms within the stock market, and it’s one of the first terms that you should get to know if you plan on investing your money in anything. It can sometimes be a risky trade, but it can also be a lucrative one – and it can allow you to make big-time trades even when you don’t have the cash on hand to make it.
When you spot a big-name trade that will almost certainly boom in the next few hours, days, weeks or months, leverage is what allows you to make this trade – and leverage is what gives you the chance to enter into a higher level of investment. But at the same time, leveraged trading comes with exactly the kind of risks that you imagine, and it can have the complete opposite effect on your investment, too.
Here’s the essential information that you should know about leverage, marginalized trading and how they can put you in a whole new class of trading.
What is Leverage?
Leverage can be compared to taking out a mortgage when it’s time to buy a house: Most people don’t have the money lying around to buy their first house or investment in cash, and they’ll need a home loan (or mortgage) to fill this gap in their finances.
The same way, when you want to buy a stock or asset that you don’t have the financial capacity to buy, you’ll rely on leverage the same way that you’ll rely on a mortgage to buy a home.
It’s a way to make the big trades, to start trading when you don’t have all of the capital on hand yet – and a lot of investors even make use of leverage to build themselves up when they’ve lost out on a previous investment that might have cost them big.
Leverage allows you a way to boost your investment, and sometimes it can be the best choice you make to get to the top.
Trading on Marginal
The success and failure of leverage depends on what’s called trading on margin. The margin can be called the actual amount of money that you’ll need to have in your trading account to make the trade happen, and this is usually a certain percentage of the value of the stock that you’re trying to buy. This percentage is agreed on between parties beforehand, and you’ll usually see this displayed amongst your trading options through your stock broker’s platform.
There are several different factors that can affect what this margin will be, including the current state of the market and the condition of the stock: Sometimes this margin will be less, and other times this margin will increase as the stock market changes.
An excellent broker can help you to identify stocks that come with little associated risk, and trading-on-margin stocks that can give you more than just your basic investment costs back. The best brokers are successful because they actually want their clients to do well – and the best brokers of them all will help you get there.
Leverage can be seen as taking out a mortgage on your house, but we can compare the margin to straight credit instead. Leverage allows you to trade against something that you don’t have just yet, while the margin we’re talking about instead allows you to directly borrow money against the stock market – and this can backfire just as badly as you would imagine, so it should always be approached only with the most trustworthy, experienced brokers that you can find.
Leverage: The Benefits
Trading on margin and making use of effective leverage when making an investment can be one of the best things that you ever do for the wealth of your investment – but that’s only when you do it right.
The obvious benefits of trading with leverage include being able to run with the big dogs even when you don’t have their class of money in your account just yet – and the other benefits of trading should become obvious when the margin trade you took a chance on actually checks out: Margin trading, when successful, can also turn out to be very profitable.
While trading with leverage is risky, we can also say that the best, most profitable investments in any sector are usually sometimes the risky ones that check out – and that approached with enough care and research, you’re not taking as much of a risk on a leveraged trade as you might think.
Leverage: The Disadvantages
Of course, using leveraged trading isn’t all good or all bad, but instead exists on some middle ground where it depends on various factors – including the expertise of the trader you invest with.\
When a leveraged trade goes bad instead of good, you’re taking the risk that you could owe the stock market (and your broker) more than the investment was ever worth – and, since you were making the trade with money you didn’t have on hand in the first place, you’re going to owe them both if it tanks.
How do you avoid this with a leveraged trade? It’s not always something you can avoid – but it’s something you should be able to prepare for ahead of time.
When you’re planning to make a trade with leverage, you should evaluate the pro’s and cons of the individual trade and decide whether or not you think this one could be worth it. Weigh up the same list with your broker and see if their opinion happens to be different from yours – and if yes or no, why?
When dealing with a leveraged trade, another way to minimize your risk is to ensure that you always have the money that you could stand to lose somewhere in a savings account for emergencies like this, and that you never leverage more than you can really afford to lose when combining your assets.
Ready to take the leap to leveraged trading?