The concept of leverage can be found in many forms of trading, such as Forex, Futures, CFDs, etc. However, the concept of its use remains broadly the same. If we want to summarize, let’s say that this tool will allow you to realize immense profits by taking risks proportional to the gains that you hope to achieve. In other words, this is a high-risk item that you absolutely have to know how to handle if you don’t want to end up ruined. Companies can use this effect to finance their investments. So instead of reselling their stocks to grow their capital, they can simply rely on debt financing. This is important as it will allow them to increase their shareholder value.
Why should you use leverage?
Leverage will allow you to unlock huge funds with limited capital.
Traders and investors use leverage to profit from fluctuations in exchange rates, as is done between countries in the Forex market. In addition, this tool is activated by the loan that you will contract with your broker. The latter is the one who will also manage your account on his platform.
When you decide to trade in the Forex market, you will first have to open a margin account with the broker of your choice.. In general, the rates you will find on leverage are:
Your broker will determine these values, and this is one of the reasons why you need to make sure you make the best choice possible when taking your first steps into online trading.Start by reading Trade Horizon Review to see what is the offer regarding trading conditions
It’s not just the broker who affects the rates you can achieve. Also, the size of the position you want to trade can also have a significant impact. For example, leverage at a ratio of 50: 1 implies that the minimum margin required for you will be 1/50, or 2%. Similarly, a ratio of 100: 1 means that you will have to have a minimum of 1/100 or 1% of the total value of the position. Also, the sum equivalent to this 1% must be present in your trading account.
Standard trading is done on 100,000 currency units. Therefore, for a trade of this size, the leverage will give you 50: 1 or 100: 1. Also, to take advantage of leverage at a rate of 200: 1 under normal circumstances, you should not take positions that are worth more than $ 50,000.
To trade $ 100,000 of currencies with a 1% margin, you will need to deposit a minimum of $ 1,000 into your margin account. On such an exchange, the leverage rate that you will achieve is 100: 1. Of course, such leverage is much more important than the 2: 1 that you will find, in general, on other stock market assets, such as stocks, or even the 15: 1 available on Futures trading, for example.
Granted, a rate of 100: 1 may sound extremely risky, but in Forex trading, it really isn’t. After all, it should be remembered that volatility is usually not as great in this market and that under normal circumstances, changes in the value of fiat currencies rarely exceed 1% during an entire trading day.
If currency pairs exhibited as much volatility as stocks, brokers wouldn’t be able to provide the leverage they all know today.