The
leverage, also called leverage or leverage in Forex and CFD trading, makes it
possible to take a position of larger underlying value in the market with a
relatively small deposit (the margin, which serves as a guarantee). We call
this contribution the margin. The remaining part of the position is financed by
the broker through the financial leverage.
The
broker charges costs as compensation for this financing and the margin trading
and financial leverage effect. These costs are settled per day, the checkout
moment takes place at 23:00 Dutch time. If you have a position at that time,
the so-called swap costs apply. View the swap costs per instrument under the
contract conditions of Admiral Markets. Also read: How Forex and Forex works
for beginners.
How does leverage and margin
trading work?
The lever is usually displayed as a ratio. With Admiral
Markets you have, depending on the account type, a choice of 1: 500, 1: 200, 1:
100, 1:50, and 1:10.
You can therefore determine the leverage and the
magnitude of the leverage effect of your account yourself. The higher the
lever, the greater the position you can take. Or in other words in terms of
margin trading - the greater the leverage, the smaller the deposit (margin).
Investing with leverage and leverage can best be
explained by means of an example.
Invest without leverage and
shares without leverage
Suppose we invest without leverage. In this example, we
are going to buy 100 shares without leverage at a price of 25 Euro per share.
The total investment amounts to 2,500 Euro.
If the price of the share rises to 26 Euro, the profit on
our position is 1 Euro per share. The total profit is 1 x 100 = 100 Euro. If we
view the profit as a percentage of the total investment, this is 4% ((100 /
2,500) x 100%).
If the price of the share drops to 24 Euro, we make 1
Euro loss per share. The total loss is 100 Euro, which also amounts to 4% of
the total investment.
Leverage and shares with
leverage
We take the same example but use leverage and buy shares
with leverage and use leverage. We set a leverage of 1:10 and buy 100 more
shares at a price of 25 Euro per share. The deposit is now (2.500 / 10) 250
Euro.
If the price of the share rises to 26 Euro, the earnings
per share will still be 1 Euro. The absolute profit is the same as for the
position without leverage: 100 Euro. If we look at the profit versus the
investment, this is considerably higher compared to the position without
leverage, namely 40% ((100/250) x 100%).
If the price of the share drops to 24 Euro we make 100
Euro, or 40% of the total investment, loss.
Benefits of acting with
leverage
As the second example with leverage shows, you can take a
position for a smaller amount and at the same time participate in the results
that correspond as if you had fully occupied this position if you had not used
a financial leverage.
If, for example, you have 100 Euro available, this is
generally little to invest with. Suppose you want to buy shares with a price of
10 Euro. You can then buy 10 shares. If the price rises to 10.10 Euro you have
made 0.10 x 10 = 1 Euro profit.
If you
trade with a leverage of 1: 100 you can buy 1,000 shares of 10 Euro (100 Euro x
100 lever) with the same 100 Euro. When the price of the share now rises to
10.10 Euro you have made 0.10 x 1,000 = 100 Euro profit.
In this
example, the strength of the leverage and the magnitude with which gains and
losses can be achieved can be clearly seen.
The
leverage ensures that large positions can be opened and can be taken advantage
of the large profits that go with it. Naturally, this also applies to the loss
side.
Another
advantage is that the lower deposit makes it easier to invest with small
amounts and to take positions in multiple instruments and thus to diversify
your portfolio more easily.
Leverage risk - Risk of dealing with leverage and
leverage
Leverage
risk - The risk associated with dealing with leverage is that a trader can take
positions that are greater than might be wise. The gains or losses that come
with it can then amount to more than the deposit. However, the profit or loss
is no more than if the same position size were taken in the case of investing
without leverage.
For the
sake of clarity, let's take the first example again and start from the most
negative scenario, the share price drops to 0 Euro:
Position without lever
The
value of the shares in this case is 0 Euro, a loss of the entire investment of
2,500 Euro.
Position with lever
The
total investment was 250 Euro. However, the value went from 2,500 to 0 Euro. A
loss of 2,500 Euro. Absolutely the loss is the same as if it were handled
without leverage.
Limiting leverage risk
Practically, the various risks that can lead to a loss of
the deposit (or larger than the deposit) are well limited:
More losses than the deposit are unlikely at Admiral Markets
because you are offered a policy to protect against negative balance.
You can take a package of measures yourself through the
institutions to protect volatility.
You can also act in micro and mini lots, with which it is
possible to open small positions. In addition, there are various options for
setting a stop loss with a maximum loss. Read more about these measures in the
article on risk management.
Learn how to handle Forex trading with leverage or CFD
trading with leverage in the right way. Practice first on a demo account and
follow our free Forex course and CFD course.
How do I change the lever
setting on my account?
Admiral Markets offers the possibility to determine the
leverage of an account yourself. Setting up the account (and leverage) is done
via the customer portal.
In the main screen of the customer portal, select the account tab (1). At (3) you see the current leverage of
your account. To adjust the lever click on the settings of the account (2).
Now click on the blue button with the current lever
setting (4).
A selection menu appears where you can select the desired
leverage. Save the selected lever (5). Note: the selected lever is only
applicable to new positions.
Take a look at our Forex Guide, where you can find more
information about how Forex works, how you make optimal use of the leverage and
other aspects and tools. You will find information that you can use as a novice
investor, in order to grow into a trader who knows what he is doing. So take a
look at our Guide!
And if you are still a beginner, please feel free to
check out our Investing for Beginners Guide, in which we explain the basics for
you so that you can start as a beginner in investing.
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