There are many different ideas about leverage and its use during the trading process. Usually, the main purpose of using leverage is that it gives the trader opportunity to trade with a large number of contracts or shares with a small amount. This is why beginner traders are advised to stay away from the large leverage, and avoid the markets that are characterized as such, for example, markets of options and warrants. However, not every expert agrees on this idea and there are markets, where more leverage is used and the actions are at lower risk.
Leverage and the risks
The reason why it is a generally accepted idea that using leverage is high-risky is that it increases the amount of money that the traders might profit, as well as might lose. For example, when the trader is owning the deposit of 1000 USD, if he/she used the leverage the potential loss or profits might be 10,000 USD for example. The perfect trading opportunity is considered to be when the trader has the opportunity to lose the same amount as they started with. It sure does increase the risks that can become true, however, the advantages are also worth taking into consideration.
What actually is the leverage
The leverage is mostly valued by experienced traders and those who have been on the market for quite some time and know the process very well. Leverage, in this case, gives them the opportunity to make the most out of their own trading capital. A trader who wished to acquire 1000 shares of stock at $20 a share, for example, would only need $5000 in trading capital. The remaining $15,000 is now accessible for additional deals. This is how a skilled trader approaches leverage.
Other than that, the leverage can also be used to reduce some risks. When the trader wants to invest 10 000 shares of individual stock which price is $10 per, he/she would require $100,000 cash. This is a lot of money and a big risk. There is another option for that. If the trader still wants to invest in the same stock with the same potential profit, on the leveraged markets they are given the opportunity to risk only $5000, roughly to say.
Trading with leverage
It is no doubt that professional traders would use high leverage markets as it gives them more potential profits. The new members trading with forex or stocks are usually given the advice to avoid the use of the high leverage, but it sounds like telling them that they should trade less effectively than the others are doing.
The brokerage company should be also taken into account and its competence since a lot of cases are when the traders are deceived by their fraudulent activities. The fact that the demand for the market was massively increased, also increased the number of illegal actions and the best advice that the traders are given before connecting with the brokerage companies is to read the reviews thoroughly that are written specifically for characterizing the main advantages, the same way as you can find the OspreyFX Forex broker reviewed on this site, where also the client experience is included. A lot of traders are saying that they will never trade without the high leverage on the markets such as stock options and warrants with the assistance of the brokerage companies and this is the trend for all professional traders.
The pros of leveraged trading
Leverage may increase your earnings while also can increase your losses. Let’s imagine that this time in Australia currency climbs versus the US dollar instead of declining. So now your open position is worth $98000 a loss of $2000 on your $100 000 initial investment, meaning that you have lost 400% of your money. So you did not only lose your initial deposit which let’s say was $500, but you will also have to pay an extra $1500 since your broker will have put a margin call on your current account to cover the losses that were made during the trading process. Also, forex brokers will demand you keep a specific amount in your brokerage account to pay margin calls if a deal goes not the way it was planned.
The trader should also have the information that, when they create a Forex or CFD trading account, they will be forced to sign specific documentation stating that the broker has the right to recoup any losses that exceed the funds in that specific account. And there are fairly awful instances about people losing significant sums of money then they were trading on those markets, and even costing them their savings and occasionally, even their homes. As a result, it is critical that the trader gets the necessary information and also hear about the real-time experiences to learn how to trade stocks before deciding to actually put money into because the education will finally cost you in some manner.
Cons of trading with leverage
It is important the beginner traders realize that 90% of those to trade on these markets go broke. Furthermore, most traders who are trading with high leverage stay on the market for several months, not even a year. The reason for that is that the broker is in need to continue to persuade new customers to take up the challenge, and there is no market that would guarantee the wealth and luxury life.
Consider a business strategy in which you forecast that 9 out of 10 traders will lose the majority and if not all the money they have deposited to the brokerage companies. It would be a fanatics business model and quite beneficial at the same time. This, unfortunately, is the reality of leveraged trading. Traders lose when they do not have the expertise to handle themselves in this certain field and the worst part in this scenario is that all the brokerage companies are aware of it. We all know that there is no such thing as getting rich quickly. But what is the formulation of this sentence – to “acquire wealth gradually”? This is behind the meaning that the traders are suggested to obtain a thorough knowledge before and education about the trading before paying to the brokerage companies a significant amount of money. It will help you to lessen the risk of trading leveraged items if the trader wants to do so because you will be prepared to trade in any market circumstances.
One of the four golden guidelines when it comes to stock investing is to never put all of your money or savings into short-term investments especially with the market that is highly leveraged. Instead, it is better for the trader to put 90% of the money in a portfolio which is medium to long term and the leverage percentage is quite low, for example, 10%. The secret is that the 10% committees trading in case of short-term with the highly leveraged market achieves equal or even better returns than the 90 % which is left.