What is leverage in stock trading?
- Leverage in stock trading includes borrowing money to increase the number of stocks involved in a transaction beyond the capital invested by the investor.
- For new stock traders, it is best to understand the potential benefits and pitfalls of investing in the stock market with leverage.
For stock traders, one of the not-so-secret tools they can use is leverage, which is their ability to borrow funds from a broker to increase the buying power they possess. currently.
For the traders relatively new to the markets, it is best to first understand the benefits and potential pitfalls of this type of investment before being seduced by its promise of great returns.
Trading with leverage
Leverage in stock trading includes borrowing money to increase the number of stocks involved in a trade beyond the amount a trader is initially willing to buy with his or her own money. own pocket. It works by increasing exposure to the underlying asset through a deposit, also known as margin, to secure the borrowed funds.
Especially for stock traders with limited capital, leverage trading is a powerful tool that can help investors maximize returns on even the smallest price changes, grow their capital exponentially and increase their exposure to desired markets.
Leverage can be used when buying on margin, as mentioned earlier, or when buying futures and options. It can also be used for exchange-traded funds that use leverage to modify their performance and to trade derivatives.
Advantages and disadvantages
Simply put, leverage in the stock market can increase return on investment every time the stock price rises (when buying). At the same time, it could also increase the loss if the alternative occurs. For example, if a trader buys a stock at $100 using $50 out of his own pocket and $50 using leverage, a price increase to $150 for the stock would mean a 100% return for the trader. (after selling the stock and returning the borrowed funds). However, if the price falls to $50, instead of only losing $50 if the trader buys using only cash on hand, they would lose 100% if leverage is used.
One of the advantages of using leverage when trading on the stock exchange is that it may come with no interest or commission obligation, although it is still a a loan. This gives the trader the freedom to use the “loan” in any way while trading.
Another good thing about leveraged trading is that it increases the amount of money a trader can use to invest in different markets. Leveraged traders can also increase their profits through profitable trades and gain access to investments that would have been too expensive or prestigious if targeted using cash alone.
Article by Mark O’Donnell » Black Bull Markets » Official site
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Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or a solicitation to buy or sell foreign exchange contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages which may result from the fact that anyone relies on such information.