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?
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.
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.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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