What is Leverage? A Beginner’s guide

What is Leverage? A Beginner's guide

Do you always find it challenging to understand the leverage, or are you planning to go for high leverage after hearing about its profits? If yes, there is no need to worry as you have landed at the right place. 

Leverage is highly complicated, and every novice trader needs to comprehend it before availing. So, if you want to know whether it is good or not, delve straight into the article. 

What is leverage?

Leverage can be defined as the borrowing of funds required to invest. If we specifically talk about the forex, this money is borrowed from the forex broker. 

In the CFD and forex industry, a trader borrows money to buy the stocks. 

Example 

Leverage is a difficult term for the newbies; therefore, we will make it easy for you with the assistance of the example. So, if a trader possesses a total of $100 in the account and utilizes leverage of 1:5, they will be able to purchase the assets that cost $5,000. Furthermore, if a trader has the leverage of 50:1, they can purchase assets worth $50,000. 

Margin 

It is worth mentioning that leverage and margin are co-related. So it is highly significant to understand the margin in the first place. 

Margin can be stated as the amount of money that an investor or trader must have to utilize leverage. A percentage is used for the expression of the margin. 

Let me explain it to you with the help of an example. If a broker needs a margin of 2%, then they will have a leverage of 1:5. On the flip side, if the trader wants to have a power of 400:1, it must have a margin of 0.25%. 

When it comes to the forex market, the leverage amount is 100:1. Therefore, it means that you can trade $100,000 in value for every 1,000$. 

Risk of the Leverage 

Although leverage lends a helping hand in making more profits simultaneously, it has a high risk associated with it. So, every trader must need to take into consideration this factor of leverage before investing their hard-earned money into it. 

Moreover, if you increase the leverage, then you are not only elevating the profit but also the loss. Keep in mind that you must have to consider the leverage provided by the broker before going for it. If you want to know about vault market registration give it a read.

Is Leverage Fixed?

If you are wondering whether the leverage is fixed or not, then here is the answer. Most commonly, the leverage is dependent on the regulatory body, and the brokers have to follow the guidelines provided by the jurisdiction. So, for the residents of the EU, the leverage has a fixed value of 30:1. Moreover, in the case of the USA, the regulatory body named FINRA or Financial Industry Regulatory Authority, the force can be provided to only those traders that have a balance of $2000 in their accounts. 

Final Thoughts 

Well, that’s all about the leverage. We are hopeful that this article will assist you in understanding the leverage in a more comprehensive way. If you are a beginner, then you must keep in mind that it is not as good as you perceive. So, it is better to take professional help and make decisions accordingly.

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