Explaining Trading with Leverage



LEVERAGE

 

Leverage is to increase traders’ market exposure, allowing them to open positions which should exceed their initial investment.

Here’s an example:

A trader wants to invest $1,000 and wants to buy a 1 lot of EUR/USD. If the trader goes to a bank, 1 lot of EUR/USD will actually cost him $100,000. Since the trader would prefer something more affordable, an online broker would be a much better choice. The trader’s broker offered him a 1:400 leverage, and what would that mean?

The asset price, $100,000 divided by the leverage is the client’s price margin, which is $250.

With this simple leverage method, the client can now buy 1 lot of EUR/USD for an affordable $250 initial investment, instead of $100,000.

The bottom line is that leverage gives you more buying possibility with the same asset for a much lower margin.

 

LEVERAGE IN STOCKS

 

Assuming that you already know the meaning and benefit of leverage, and how to calculate it in forex, but how about calculating leverage with stocks?

Here is an easy explanation on how to understand the Leverage in Stocks Method:

Say for example, you want to invest $1,000 and want to buy 1 lot from a company. However, this company’s 1 lot is equivalent to 50 shares which costs $200 each. If you are trading with a bank, 1 lot of this company would cost you $10,000, since the price of asset is multiplied by shares, giving you the price margin.

However, if you are trading with a broker and the broker offers you a 1:400 leverage, 1 lot will now only cost you $250.

The reason behind this if you multiply the price of the asset by its shares, and then you divide it by the leverage, you will get your price margin as the answer.

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