When it is convenient to use a broker’s leverage
The amount of transactions in the exchange market can be millions, and not always a trader has the right finances. In order to conclude a profitable transaction without getting into a bank loan, there is such a notion as the leverage of a broker. Thanks to it, you can get more money, and thus increase your income.
The second name of this trader tool is financial leverage. It characterizes the ratio of a broker’s personal capital to the funds that he uses for transactions. Thanks to the leverage, you can make expensive transactions even if you don’t have the necessary amount on your account. For example, a novice investor has a budget for transactions – 1000 dollars, but there is a profitable option, which requires 20 thousand dollars. The necessary money can be borrowed from a broker, it will be a leverage of 1:20. To protect yourself from losses, the broker fixes a threshold similar to the amount of collateral or budget – 1000 dollars. This will help to secure in case of failure. Then your loss will be no more than $1,000, and the broker will get his funds back. This situation is called a margin call. In case the transaction will bring income, you get it, and the broker gets his money.
Using the leverage for the first time, you need to understand its features. Its size depends on the financial instrument, conditions of the deal, liquidity. There can be several options of cooperation with a broker.
The easiest way is to buy assets at a low price and sell them at a high one. After analyzing the transaction, you apply for leverage. After making a transaction with profit or loss, you return the money.
The second option. You want to profit from a decrease in quotations, but you do not have shares. You take them from a broker, sell them at the current rate, and after the fall you buy them at a lower price and make a profit. Return the money to the broker and stay on the plus side.
Leverage allows you to use different strategies to trade on the stock exchange. The optimal solution for calculating financial leverage is a specialized trading system. The most popular on the stock market is QUIK. Using leverage, keep an eye on the risks and try to reduce them to zero. For this purpose, experts recommend stop loss. It represents the value, which should be reached, to complete a deal. Then the trading system registers the level of profit or loss. By using stop loss, you can avoid the loss of large funds.
You should not make a deal for your entire budget. It is better to allocate funds for different projects. Beware of crooks, which means that you should be careful when choosing an asset and operating with it.
