Leverage

Leverage associated with a broker

Leverage is a means of increasing your potential return on an investment by using a capital loan or other financial instruments, such as margin, bonds, options or futures.

The use of leverage allows a trader to control a much larger position with a smaller account than they would without leverage.

A forex broker can effectively "lend" capital to a trader, who can then open a much larger position than they normally could. Leverage is a key part of money management.

Leverage in trading

If employing leverage forms part of your strategy, which is the case for most traders, it's important to remember that its use not only magnifies your gains — it will also increase your losses if the market moves against you.

Your leverage depends on the size of the trades you make relative to your account equity, and nothing else, as long as you don’t surpass the maximum leverage the broker allows.

As an example, if a broker offers a leverage of 100:1, then a trader can purchase a standard lot of $100,000 with only $1,000.

This means that a trader can trade with each pip being worth $10 and gain $100 with just ten pips. Without leverage, you would need $100,000 to achieve the same result.

Other uses of leverage

Leverage is the term used to describe the amount of debt a company can use to finance its expansion, which could be projects, assets or other activities. Debt is a cheaper way for most companies to pay for their growth but carries obvious risks. The alternative would be to increase their equity through new share issuances to raise capital. Companies that have a higher proportion of debt to their equity are said to be highly leveraged.

A common form of leverage for almost everyone is taking out a mortgage to buy their home, as a mortgage normally entails a loan of some sort that may be up to ten times or more the borrower's salary. The bank loans, say, $100,000 to the home-owner, who earns $20,000 a year, to buy the property. This would be a leverage ratio of 5:1. The home-owner doesn't see the money — the bank pays the property seller directly, while the borrower repays the bank over a fixed period, usually 20 or 25 years. Leverage through a mortgage is the only way most people can afford to buy a home.

Further reading

Visit our lesson on leverage to find out more information:

Lesson
Learn how to use forex leverage to your advantage and maximise your profits, as well as how to avoid the dangers.
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Learn about the importance of money management:

Some brokers offer floating leverage systems. Visit our broker section for more information and advice:

  • "A can effectively "lend" capital to a trader, who can then open a much larger position than they normally could. Leverage is a key part of money management"

    Hello, this statement does not make sense to me could someone please explain it?

    Roo
  • Hi roop, which part exactly do you not understand? Your broker basically lends you money (for example 1:10) so you can trade with larger positions than you normally could.

    Maybe this video will help you to understand it better than article.
  • i just realised this maybe a grammer mistake should it read" A broker...." ? sorry I'm a bit dumb sometimes smile
  • hello,
    if i well understand the explanation above mean
    for 1:200 leverage = a trader can purchase a standard lot of $200,000 with only $2,000.
    = a trader can purchase a standard lot of $10,000 with only $100.

    is this correct??
  • Teaching Assistant and Community Supporter
    Hi toujani,
    At 1:200 you can purchase 200,000 for 1,000 and 10,000 for 50. Regards.
    Hindsighthero
  • 1:200 ; %amount%*200 = numb of lot
    great thanks for help
  • Can I change the leverage
  • Hello Mr.prince,
    It depends on your broker. If your leverage is low it would be good to keep it low until you become profitable. If it is high you don't have to open large positions. Only your margin requierement will be lower.
    Hope it helps.
    Adam
  • Hello Adam.O,

    Leverage Low
    I chose a low rating during recording "A"
    I want to lift Can I change the leverage
  • It depends on your broker. Write e-mail to broker's support. They will answer your question. You can ask them during working days. Let me know if it helped.
  • Teaching Assistant and Community Supporter
    Hi Mr prince,
    It doesn't matter what you choose on the application, that is only a query to test your knowledge on the investment field. All Varengold accounts come with 200:1 maximum leverage, and as Adam noted you choose the actual leverage by setting position size which is limited to 5 X 0.01 lot at any given time. Hope it helped to clarify things.
    Peter
  • Hi,

    As given in this page "The bank loans, say, $100,00 to the home-owner, who earns $20,000 a year, to buy the property. This would be a leverage ratio of 5:1. "

    Can anyone explain me how its leverage ratio is 5:1 in this case?
  • Hi Faraaz,

    The person, who wishes to buy the house, currently earns 20.000 usd per year. The bank is OK to grant him a loan of 100.000 usd.

    If you calculate the ratio between the loan and the earning, you have 100.000 / 20.000 = 5.
    That is to say that for 1 earned dollar, the bank is OK to lend 5 times more; thus the person can buy a house 5 times more costlier than his earnings should allow him to buy. Then the leverage in this situation is 5:1.

    Now, to come back to Forex for example, if your broker "gives" you a leverage of 100:1, you can buy a single lot of EUR/USD (which worth 100.000 USD) with only 100.000/100 = 1000 USD.

    Is it more clear now? Keep me informed.
    Sebastien
  • Hi Sebastien,
    It is much clear..thanks for your help..
    It is given as loan amount 100,00 in the contents.
    Plz change it to 100,000
  • Faraaz:
    Hi Sebastien,
    It is much clear..thanks for your help..

    Glad to hear it! smile

    Faraaz:
    ...
    It is given as loan amount 100,00 in the contents.
    Plz change it to 100,000

    I will escalate this issue. Thanks a lot for your help.

    Regards,
    Sebastien
  • Teaching Assistant and Community Supporter
    Thanks for spotting it. It's fixed now!

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