Leverage

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    Leverage associated with a brokerLeverage is a means of increasing your potential return on an investment by using a capital loan or other financial instruments, such as margin, bondsoptions or futures.

    The use of leverageLeverage is a means of increasing your potential return on a... More allows a traderWhat is a trader? A trader is a person who buys and sells... More to control a much larger position with a smaller account than they would without leverage.

    A forex brokerWhat is an online broker? In online trading, a broker is ... More can effectively “lend” capital to a trader, who can then open a much larger position than they normally could. Leverage is a key part of money managementMoney management refers to one of the most important concep... More.

    Leverage in trading

    If employing leverage forms part of your strategy, which is the case for most traders, it’s important to remember that its use not only magnifies your gains — it will also increase your losses if the marketWhat are value stocks? A value company is a company that app... More moves against you.

    Your leverage depends on the size of the trades you make relative to your account equityWhat is equity? In accounting and finance, equity is th... More, and nothing else, as long as you don’t surpass the maximum leverage the broker allows.

    As an example, if a broker offers a leverage of 100:1, then a trader can purchase a standard lot of $100,000 with only $1,000.

    This means that a trader can trade with each pip being worth $10 and gain $100 with just ten pips. Without leverage, you would need $100,000 to achieve the same result.

    Other uses of leverage

    Leverage is the term used to describe the amount of debt a company can use to finance its expansion, which could be projects, assets or other activities. Debt is a cheaper way for most companies to pay for their growth but carries obvious risks. The alternative would be to increase their equity through new share issuances to raise capital. Companies that have a higher proportion of debtDebt is a type of liability. It is an obligation by one pa... More to their equity are said to be highly leveraged.

    A common form of leverage for almost everyone is taking out a mortgage to buy their home, as a mortgage normally entails a loan of some sort that may be up to ten times or more the borrower’s salary. The bank loans, say, $100,000 to the home-owner, who earns $20,000 a year, to buy the property. This would be a leverage ratio of 5:1. The home-owner doesn’t see the moneyMoney is a generally accepted medium of exchange to buy and... More — the bank pays the property seller directly, while the borrower repays the bank over a fixed period, usually 20 or 25 years. Leverage through a mortgage is the only way most people can afford to buy a home.

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