OP 03 September, 2022 - 04:24 PM
(This post was last modified: 03 September, 2022 - 04:24 PM by Empxthy.)
How does leverage work?
You can use leverage with an online broker. Here you see an overview of online brokers where you can trade in stocks with leverage. After opening an account you can directly use leverage. You apply leverage by investing more money than you deposited on your account. But how is the leverage handled within your investment account?
Leverage can be compared to a loan. The broker finances a large portion of the purchasing price and the difference between the opening and closing price will eventually be settled in your account balance. You are never the owner of a stock; the broker will take care of both buying and selling. When trading CFD’s, you don’t have any other responsibilities because you’re never the owner of the stock.
Example of trading with leverage
In this example, we assume that you have $1000 in your trading account. You decide to buy shares for this amount at a price of $10. The price increases during the day, and when the price hits $12 you close the position again. What would be the results of these investments with and without leverage?
Without leverage: the price has risen $2 and for $1000 you could buy 100 shares. These 100 shares have increased in value by $2. Your total profit in this case is $200 or 20%.
With leverage: you decide to apply a leverage of 1:10 to your investment. You can now buy shares for $10,000. You can open a trade on 1000 shares. These shares have increased in value by $2. Your total profit in this case is $2000 or 200%.
As you can see, in this case you would make a larger profit by using leverage. Remember, however, that the same could have happened in the opposite direction. If the price had decreased, your loss would have been larger when you would apply leverage!
You can use leverage with an online broker. Here you see an overview of online brokers where you can trade in stocks with leverage. After opening an account you can directly use leverage. You apply leverage by investing more money than you deposited on your account. But how is the leverage handled within your investment account?
Leverage can be compared to a loan. The broker finances a large portion of the purchasing price and the difference between the opening and closing price will eventually be settled in your account balance. You are never the owner of a stock; the broker will take care of both buying and selling. When trading CFD’s, you don’t have any other responsibilities because you’re never the owner of the stock.
Example of trading with leverage
In this example, we assume that you have $1000 in your trading account. You decide to buy shares for this amount at a price of $10. The price increases during the day, and when the price hits $12 you close the position again. What would be the results of these investments with and without leverage?
Without leverage: the price has risen $2 and for $1000 you could buy 100 shares. These 100 shares have increased in value by $2. Your total profit in this case is $200 or 20%.
With leverage: you decide to apply a leverage of 1:10 to your investment. You can now buy shares for $10,000. You can open a trade on 1000 shares. These shares have increased in value by $2. Your total profit in this case is $2000 or 200%.
As you can see, in this case you would make a larger profit by using leverage. Remember, however, that the same could have happened in the opposite direction. If the price had decreased, your loss would have been larger when you would apply leverage!