Leverage is the art of wielding an augmented financial power with little of your own capital while borrowing the rest of the funds. In the realms of forex or CFD trading, leverage empowers traders to command trade orders of much larger proportions compared to their actual account balance.
That being said, Stake-Hub is a prominent broker that allows its clients to engage with leveraged trading on diverse financial products. The brand furnishes an optimal trading platform as well as seamless working conditions to facilitate a balanced exposure to the markets.
Understanding leverage: How does it work?
Essentially, leveraged positions are sustained through borrowed funds from the broker, enabling traders to aim for amplified returns. For instance, to assume control over a $10,000 position, a mere $100 in your trading account would suffice if you were employing a 100:1 leverage.
It is worth noting that this $100 requirement in your account represents the “margin,” which is the amount demanded by your broker to initiate a leveraged position. Margin is frequently expressed as a percentage of the total position amount: trading brokers typically stipulate margin requirements of 10%, 5%, 1%, or even less.
Leverage helps traders in bolstering their buying power and procuring “magnified” returns on their limited initial capital. Put simply, leverage is like having a special power that allows you to increase the impact of your assets, but only if you have enough money set aside as a deposit.
It is different from the usual and slow way of investing because it gives traders the chance to multiply their investments by hundreds of thousands of dollars within a short time.
Risks of using leverage
Although harnessing the power of leverage may indeed transform your aspirations into tangible achievements, it is crucial to acknowledge its equal level of risks.
You should be aware that while a single leveraged trade can propel your capital’s growth to extraordinary heights of 50%, 100%, or beyond, it can also wipe your initial funds as well as profits if the trade veers off course.
To truly grasp the perils at hand, let us embark on a hypothetical journey with $2000 as your trading capital and a broker granting you the leverage of 100:1, which equals a 1% margin requirement. Now, envision yourself initiating a “buy” trade on the EUR/USD currency pair with the full 100:1 leverage. Consequently, you have ventured into the market with a grand trade valued at $200,000, leveraging a mere $2000 of your own funds.
It is important to know that now your profits or losses will be measured against the “market exposed” amount – $200,000 – while the deductions or additions will affect your actual deposit of $2000, rendering leverage an inherently perilous tool.
With that established, let us contemplate a scenario where your speculative anticipation fails and EUR/USD moved down a few pips, devaluing your $200,000 trade to $199,000. Although the drop accounts for a trivial 0.05%, the ramifications will be dramatically magnified. You will encounter a loss of $1000 (computed based on the leveraged amount) against your initial capital of $2000. In a single trade, your account plummets by 50%, reaching $1000, due to the exorbitant employment of leverage!
In conclusion, it is essential to first explore the potential hazards and benefits associated with leverage before deciding to make use of it. Many trading brokers like Stake-Hub empower their clients with first-class support and expert analysis to help them make more educated leveraged trades.
Undoubtedly, by unraveling the intricate web of risks and opportunities linked with leverage, you can determine whether this exhilarating domain is a suitable ally for your financial ventures.