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How to Leverage Your Trading Position by Secure Paymentz
Leverage works the same way in trading as it does in real estate, where it can be a good thing or a bad thing depending on how it’s used. In finance, leverage refers to how much of your own capital you use to control borrowed capital, resulting in profits and losses that are based on changes in the price of the underlying asset instead of the value of your cash balance. If you have ever wondered how to leverage your trading position, follow these steps for safe and effective use of margin trading on your brokerage account.
What Is Leverage?
You may hear a lot about leverage trading software (more info: https://SecurePaymentz.us) and margin when you read trading advice. But what is it? In short, leverage refers to your ability as a trader or investor to use borrowed funds (like money from a loan) in order to increase your exposure in markets. The practice allows you buy more assets than you would have been able with just your own cash – which means you can potentially make more money when things go right, but also lose more money when things go wrong. Most people talk about leverage in terms of borrowing or leverage ratios – these terms refer to how much debt an individual is taking on, as a percentage of his total account size.
The Biggest Pro of Leverage
There are many advantages of leverage. The biggest pro is that it enables traders to trade with more money than they could if they traded on margin using only their cash balance. For example, with a $2,000 cash balance, you can trade with $50,000 worth of securities (assuming a 50% margin requirement). As another example, if you have a $10,000 account balance and use 10:1 leverage, your actual trading balance for that position would be $100,000 (assuming a 10% margin requirement). The Bottom Line: You can trade more capital than you actually have on hand when you take advantage of brokerage accounts that offer margin trading capability. You may find opportunities to profit from higher-risk investments because your buying power has increased.
The Biggest Con Of Leverage
When you’re trading with leverage, it’s important that you remember something called a margin call. This means that your margin balance—which is basically your money borrowed from your broker—drops below a certain threshold, and your account gets liquidated. While it sounds scary, margin calls are just part of trading on leverage and can actually be used as a strategy. The goal is to keep enough money in your account so that if (or when) a margin call occurs, you’ll have enough in equity that you won’t get liquidated. This allows traders to make larger trades than they would be able to otherwise.
Why Investors Use It
Even experienced investors know that leverage can magnify gains but also losses. For example, let’s say an investor buys a stock for $100 and it increases to $105. With no leverage, their total return is 5%. Now, if they bought $1000 worth of that stock and used a 2:1 margin, they would have made 10%, or $100 (their initial investment). So their total return would be 15%. But what happens if instead that stock decreased by half? Well with no leverage, your total loss is 50%, which may seem bad but not awful when you consider that your initial investment was just $100.
What Does It Feel Like To Trade On Margin?
The first thing you need to know about margin trading is that it’s expensive. A typical brokerage will charge interest on margin loans, which can be as high as 25% a year. So when your account earns 10%, for example, that money goes toward paying down your debt rather than getting paid out to you. (For related reading, see Margin vs. Lot Size and Efficient Market Hypothesis.)
Things You Must Consider Before You Invest On Margin
Before you can understand how to leverage your trading position, it is important that you understand what margin trading really is. If we were to give you a quick definition, it would be: Buying something with borrowed money. Yes, that may seem simple and you probably think that you have a good understanding of what margin trading is. After all, most people will tell you that buying stocks on margin isn’t very different from using your credit card or line of credit at a store. Unfortunately, while these are technically correct statements they only scratch the surface of just how different trading on margin can be from traditional banking and borrowing practices.
Things To Know Before You Start Trading On Margin
Margin trading can get you into trouble fast. First, know that it’s not free money. You are borrowing money from your broker, so you have to pay interest on that loan (though some brokers do not charge interest). Second, be aware of your trading position at all times. If a margin call is triggered, your broker can force liquidation of assets in order to cover what you owe. Don’t trade on margin unless you understand how it works and know how much risk you’re taking on. Start small; gradually increase as you gain experience and confidence in your ability to manage risk intelligently.
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