There are a lot of reasons why people from all over the world get interested in CFD and Forex trading, but most of them have the same denominator – leverage on trading is very appealing.
With leverage, a trader gains access to a huge market position without paying the whole amount of the actual trade value. Unlike traditional currency trading, you are required to pay for the exact value to buy your desired number of shares. Therefore, understanding leverage is very important if you decide to trade on CFD or any other leverage products out there.
Failing to understand leverage and how it works will make you financially cripple almost in an instant. To say it simply, bankruptcy is inevitable if you don’t know about leveraging as well as its pros and cons.
Leveraged products are similar to a mortgage. If you buy a house and mortgage it from the bank, you most likely have to pay for a certain amount before you can take on the property. For instance, the house you are about to buy is worth $750,000. The bank will have to require you a minimum deposit of 10% for you to secure the purchase of the property. Therefore, the deposit amount that you need to shed is $75,000. This case is similar to leverage on trading. You will have to pay a small amount to take control of the entire capital.
How Does Trading on Margin Works?
Margin trading the deposit requirement that you have to pay when opening a trading account before you are allowed to start trading. This margin is only a small amount of the entire value of an asset that you want to purchase. Also, the amount of margin will depend on the factors present in the market such as liquidity, asset class, and market volatility.
Though margin and leverage look similar, it actually has different concepts. Leverage is more like taking a debt while margin is borrowed money. Because of this, you can utilize margin to make leverage.
How Profits and Losses Magnified in Leveraged Trading?
Now that you’ve understood the real meaning of Forex leverage as mentioned above, you now have a clear view of its benefits, particularly that it frees up some of the capital money that you can utilize in other investments that can magnify profits more quickly. These are great benefits of leveraged trading but it is important to note that losses are also inevitable and can be magnified.
This only means that you will not only gain money with leverage but the losses are also very much possible. Therefore, it is very important to understand everything about leverage on CFD trading before anything else. Understanding the risks involved will help you in creating a risk management plan that will minimize the losses. As much as possible, you can utilize the free demo account so you can experience what it feels like to actually trade. The free demo account is a very good option for first time traders.