Leverage
What is leverage?
It's the use of borrowed money to magnify, 'leverage', a small cash investment into a much larger market position in assets of all kinds. Investors use leverage to try to get bigger returns. If all goes well, the final return minus what you owe, could be much greater than your initial cash stake. If it all goes wrong, so could your losses.
Where have you heard about leverage?
It’s built into some financial products such as options and other derivatives. Contracts for Difference (CFDs) are well-suited to leveraged trading. A separate definition of leverage refers to the size of a company’s debts compared with its equity.
What you need to know about leverage...
Leverage is an investment model in which the investor is required to put up only a fraction of the total value of the position they wish to take. The provider of the leveraged product is lending the balance. The size of this small cash stake, known as a margin payment, varies with the types of assets and markets in which you want to trade. A deep, liquid and relatively calm market will require a smaller margin, perhaps 5 or 7% of the value of the position, while a volatile market will see traders asked for more margin, perhaps 10% or more.