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Many investors have come across the term leverage trading, a powerful investment tool used quite often not only in the financial but also in the mainstream media. However, do investors know how to fully utilize that weapon in their investing arsenal? Let’s explore this concept in detail.
WHAT IS LEVERAGE TRADING?
Investors can make far more money than they physically have by borrowing funds from their broker on top of their existing balances with the aim of maximizing their buying power and ultimately return. Put differently, it’s using borrowed capital on top of your own equity (cash) to magnify the potential returns of your bet.
WHAT IS A LEVERAGE RATIO?
In simple terms, it is the ratio between the amount of money you can trade over the amount of money you have. For instance, a 10:1 leverage ratio means you trading up to $10 000 for every $1 000 exposure to your broker. This will allow you to increase your equity (money) up to $10k. Now your buying power is up 10x allowing you to make much larger investments.
HOW DOES LEVERAGE TRADING WORK?
Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at
Leverage works by using a deposit, known as margin, to provide you with increased exposure. Let’s continue with our previous example. Suppose that you currently have $1000, but you feel that is not enough if you aim for 10% return or $100 gain. If you decide to use 10:1 leverage to boost the return of your initial investment, the broker will take your $1 000 and lend you the rest or $9 000. In essence, bumping up your buying power or equity to $10k. Now if you successfully achieved that same return your profit will be $1000 or ten times larger with the use of leverage. Hence, leverage is great as it increases your future profits but also can act as a double-edged sword leading to higher future losses. So, the next question that comes to mind is
HOW MUCH LEVERAGE SHOULD I USE?
Choose the leverage you are comfortable with depending on your experience, financial knowledge, and comfort level.
Obviously, beginner investors should be careful as leverage amplifies your potential gains as well as possible losses.
HOW LEVERAGE TRADING APPLIES TO MULTIPLE ASSET CLASSES
Leverage can be used across a variety of financial markets stocks, indices, forex, treasuries, CFDs, and ETPs. Also, you can use leverage in investing outside your margin account. Leverage exchange-traded funds (ETPs) use borrowed funds to deliver returns of 2x, 3x or even 5x vs their benchmark indices. There are many advantages of using ETPs in comparison to other investment vehicles that use leverage.
Benefits of using ETPs vs other financial instruments.
BOTTOM LINE
Borrowing money enables you to make investments on a much larger scale.
The drawback being it is a double-edged sword as it magnifies your winner as well as possible losses.
ETPs unlike other financial products offer a practical and elegant solution to most problems created by the use of leverage.
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
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Restez connecté
En vous inscrivant ici, vous acceptez notre politique de confidentialité et vous recevrez nos bulletins d’information. Vous pouvez vous désabonner à tout moment en suivant le lien figurant au bas de chaque lettre d’information.
This is a marketing communication. Please refer to the Prospectus of the ETPs and to the KIID before making any final investment decisions.
This information originates from Investium Limited, which has been appointed as distributor of Leverage Shares products in Europe by Leverage Shares Management Company Limited (the “Arranger”). Investium Limited with registered address at 6 Nikou Georgiou Street, Office 302, 1095 Nicosia Cyprus, is a financial services provider regulated by the Cyprus Securities and Exchange Commission (CySEC).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. Investium Limited and the Arranger (together referred as “Leverage Shares”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of Leverage Shares. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Leverage Shares.
© Leverage Shares 2024
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An investment in the promoted ETPs may only be made based on the ETPs´ legal documentation and will be subject to terms and conditions contained therein.
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions. The ETPs shown on this website are not available for sale in the U.S. or to a U.S. person.
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This website is accessible to retail investors in the UK for informational purposes only. Leverage Shares does not directly distribute to retail investors. Retail clients should not rely on any of the information provided and should seek assistance from an IFA for all investment guidance and advice.
Information contained in this website is intended only to provide general and preliminary information and does not constitute any legal or investment advice, an offer to sell or solicitation to buy any security, including shares of any Exchange Traded Products (“ETPs”).
An investment in the promoted ETPs may only be made based on the ETPs´ legal documentation and will be subject to terms and conditions contained therein.
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions. The ETPs shown on this website are not available for sale in the U.S. or to a U.S. person.
I acknowledge having my legal residence in the selected location.
Please confirm the Terms and Conditions by clicking on “I agree”.
This website is for informational purposes only.
Information contained in this website is intended only to provide general and preliminary information to FCA regulated firms such as Independent Financial Advisors (IFAs) and Wealth Managers. This information does not constitute an offer to sell or solicitation to buy any security, including shares of any Exchange Traded Products (“ETPs”).
An investment in the promoted ETPs may only be made based on the ETPs´ legal documentation and will be subject to terms and conditions contained therein.
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions. The ETPs shown on this website are not available for sale in the U.S. or to a U.S. person.
I acknowledge having my legal residence in the selected location.
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The material contained on this website is not intended as a recommendation to buy, sell or hold any security or to adopt any investment strategy.
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The content on this website is for informational purposes only and is educational in nature.
The material contained on this website is not intended as a recommendation to buy, sell or hold any security or to adopt any investment strategy.
