Leverage allows traders to obtain a vast degree of exposure to a financial budget without needing to tie up a large amount of capital. It is one of the premiere features of CFD trading. Should you choose to invest in a leveraged product you will more often than not be asked to put up an amount of capital, which represents a fraction of the value of your position in the trade. It is basically a loan system, as the product provider is lending you the excess balance required. Trading with leverage products can be precarious, so the question is, are leverage products right for you?
Leverage magnifies both the profit and loss within a trade, so in one aspect it can make your gains look impressively healthy, but your losses won’t be limited to just the margin you have implemented. Your possible loss, which is seen, as a percentage of any investment, will always be higher should you trade using leverage products. However, it is worth noting that the risk, in terms of the most you can lose, is the same whether you buy a product a full-price or via a margined deposit. It makes thinking about how you position yourself all the more important, as you should never make a leveraged trade without being assured that you can cover any possible losses involved.
Trading with leverage is becoming increasingly common, as there are various ways in which you can do so. Leverage products include the following:
|Futures||Whenever anyone mentions the term futures, they are referring to a futures contract that is agreed upon on the floor of a trading exchange. Such agreement is with regards to buying or selling an asset in the future at an agreed price.|
|FX||FX trading is speculating on the future value of a currency when compared to another. FX traders will trade on the movements of a currency pair, of which both will be compared to each other.|
|CFDs||CFD stands for Contract for Difference and is an agreement to exchange the difference between the value of an asset at the time in which a position is proposed and subsequently executed.|
|Binaries||Binaries are simple yes/no deals, which allow you to speculate on the performance of a particular market sector over a set amount of time. The unique aspect is that said prediction can only have one of two outcomes.|
|Options||Options are a form of deal memo that allows an investor to buy an underlying asset at an agreed price before a pre-determined date, should they choose to.|
Leverage can be a point of both success and failure for any perspective market trader, largely as a profitable outcome is related to direction. However, issues tend to arise when inexperienced traders use leverage inefficiently and leave themselves open to losses. Over leveraging accounts have become and altogether too common occurrence. Good traders strike a fine balance, so when deciding if you should use leverage products, the answer will largely be a personal one. But, if you do choose to do so, make sure you are knowledgeable and prepared for what lies ahead when trading with leverage products.