What is Leverage Trading?
Leverage allows a client to trade without putting up the full amount. Instead, a margin amount is required. Traders use leverage to significantly increase the return on a CFD investment. Simply speaking, leverage is a loan that is offered to an investor by the broker that is handling his or her account. Leverage varies according to the instruments.
Common leverage amounts offered by most brokers:
Examples of leverage trading
You decide that you want to buy Google Shares. Instead of purchasing 1,000 Shares of Google from a Stockbroker, you buy 1,000 CFDs of Google on a trading platform. If there is a $4 per share fall in the price of Google, you would receive a $4,000 loss. However, if there is a $4 per share rise in the price of Google, you would receive a $4,000 profit, just as if you had purchased the actual shares.
With a deposit of $1,000, your equity is $1,000, leverage to trade forex: 1:400. Your total to trade with is $1,000 x 400 = $400,000
You open a trading account with $5,000 as margin, which is the collateral or equity in your trading account. Your leverage is 50:1 for major currency pairs. This implies that you can put on a maximum of $250,000 ($5,000 x 50) in currency trading positions.