Leverage

Glossary

Banking

Leverage

In a trading context, leverage enables traders to pay a small margin to put on a position that is much larger than the amount of the margin i.e. the position is leveraged. Depending on the trading platform, traders can trade on anything from 10x to 30x leverage. At the upper levels, the risk of loss is significant – it only takes a small counter market move to wipe out the margin and require margin calls – demands from the broker to cover the position. To protect capital at risk, traders typically put stop-losses on trades where trades unwind once stop loss levels are reached. Leveraged investing is a strategy using borrowed money to increase returns. For example, the return to an investor who has $100 and invests it in a one-year fixed-rate investment paying 10% is 10%. However, the return for the leveraged investor with $10 who borrows $90 (9x leverage) to make the same investment is 100% (excluding financing fees).

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