Leveraged trading has been in vogue for over a decade now. Those interested in online trading have come to see leverage as a quintessential financial tool, which offers traders bigger market exposure with a much smaller initial expenditure. Here, we ask what is leveraged trading, and how is it incorporated into the trading environment?
What is leverage?
Leverage is an investment tool that offers a trader greater market exposure with a small amount of initial capital – traders fund only a portion of their position value and borrow, or leverage, the rest from their broker. Although you only pay a small initial deposit, your profit or loss will be based on the total value of the chosen position.
What is leveraged trading?
Leveraged trading allows a person to control larger amounts in a trade by depositing a small initial amount of capital, essentially borrowing the rest of the money used to open a position from your broker.
It is important to clarify that leverage drastically differs from a loan. Primarily, once trading with leverage, you are not expected to pay any interest. Instead, you are responsible for closing your position, or keeping it open before it is closed by a margin call.
Leverage can be applied to a span of various asset classes. In the stock market, leverage can be added to trading portfolios through options, futures contracts and margin loans. Leveraged opportunities can also be found in the bond market; for instance, when market exposure rises at a lower short-term rate with the later opportunity to invest at the much higher long-term rate, it allows a trader to profit from the price difference between the two. And last but not least: the foreign exchange market is also known for being a highly leveraged market.
Now, you might wonder where and how leverage can be implemented. Well, in fact, contracts for difference (CFDs) are perfectly-suitable for leveraged trading. A contract for difference (CFD) is a popular type of derivative that allows people to trade on margin, ensuring greater exposure to global markets.
Trading with leverage
As you have probably figured out by now, the successful incorporation of leverage into trading strategies can be profitable for traders – though it can also magnify losses. The key benefit of leverage is that due to the freed up money, it enables you to take a larger position than would otherwise be possible with available, disposable capital.
Leveraged trading with Capital.com
Capital.com’s trading platform allows its users to trade with leverage. You can trade CFDs on indices, commodities, stocks, currency pairs and cryptocurrencies. Find our full list of available markets here.