Trading using leverage or, as it is also called, margin trading, is a system that allows you to conclude transactions in cases where the amount is many times greater than the total capital of the trader. Thus, the trader invests only a small percentage of the funds in the trade; the exact value of this percentage depends on many factors, including the broker, platform and asset. Nowadays, the margin trading system is very popular. Leverage, as a rule, denotes the ratio of a trader’s own funds to the total amount, and margin – the same ratio, expressed as a percentage.
Benefits of leveraged trading
The popularity of leveraged trading is due to the many advantages of this type of trading:
- Investment capital minimization. For the transaction you need to pay not the full cost, but only a small part of it. For example, when opening a deal for $ 3,000 with a leverage of 1: 400, you only need to invest $ 7.5 from your own funds.
- Availability of tools. If trading some instruments is possible with a small start-up capital, then investing in more prestigious assets costs a lot of money. With the help of leverage, such investments become more accessible: now there is no need to enter the market for these assets itself, it is enough just to play on the difference in rates, having secured a leverage.
- Great responsibility regarding risks. With the help of margin trading, you can enter the market with a small capital, but there is also a considerable risk in this: the more you can earn on a trade, the more you can lose if the trade is unsuccessful. Trading with leverage educates the trader by constantly reminding him of the big risk, so it will be faster to learn how to work with stop-losses in order not to get a huge loss.
An example of trading using leverage
Let’s imagine that the price per troy ounce of gold is now $ 1,327. Let’s say we make a forecast for a rise in gold and open a large trade of 10 units of a commodity. The total amount of the transaction, therefore, will be $ 13,270 – it is dangerous to risk such an amount, and many traders simply do not have it. At TrustMarkets for such positions a leverage of 1: 100 (margin 1%) is provided; this means that for every $ 400 of a trade, you only need to invest $ 1, and the total trade amount with this leverage is only $ 132.70.