What is Leverage ?

in order to understand what is Leverage we have to simple Define Leverage for you and we are talking about financial Leverage, as there is also a TV series called this way and while we would like to show you the leverage cast of season 2 , it would only confuse you more.

Leverage Definition

Leverage in finance | the textbook definition of “leverage” is having the ability to control a large ( larger then you actually have) amount of money using none or very little of your own money and borrowing the rest.

this is the meaning of Leverage in the shortest form.

so how does leverage then actually work now that you have the leverage meaning sorted out.

well it is actually just as simple , best shown through an example.
For example, to control a $250,000 position, your broker will set aside $2,500 from your account. Your leverage Ratio is now, is now 100:1.

You’re now controlling $250,000 with $2,500.

so why is leverage the useful you might ask

Let’s say the $250,000 investment rises in value to $251,000 or $1,000.

If you had to come up with the entire $250,000 capital yourself and you had to see how much actual profit you made then you would be very dissapointed by the result.

, your return would be less then 1% , 0.2% is more accurate ($1,000 gain / $250,000 initial investment).

This is also called 1:1 leverage as you put all the money and the broker did not lend you anything. the risk is ofcourse also minimum in this case.

now in the example you are not leverage 1:1 but 1:100

in this case The broker only had to put aside $2,500 of your money, so your return is a much better 40% ($1,000 gain / $2,500 initial investment).

So why is Leverage something to be careful with ?

now here comes the hard part. as fast as you are able to make money this way you are also able to loose it this way . lets say you made a $2500 on your trade which equal 1% of the total but an 100% of your investment ( see where i am going ?)

now instead of being in the money you lost the trade and price of the asset you were trading went down $2500, this would mean on the the total investment you made you lost everything.

what is leverage and why leverage 1:1000 is not always the right way to go

Leverage on some assets are very popular, leverage on Bitcoin, Leverage on Gold you will find that every broker offers different rates here.

The broker also takes a risk as they offer more leverage the way for you to make a profit fast also goes up , but believe me they did the calculation more people loose this way then actually win.

the leverage offered by brokers most of the time is different for commodities then it is for Forex . and cryptocurrencies have even a lower leverage.

Trading with Leverage requires some training and don’t just look at the number , the fact that if you are able to trade with 400:1 leverage or even more 1000:1 , sounds amazing but this is a 2 edge sword as fast as you are able to make profits in this case you are also able to loose them just as fast if not faster.