What's Stock Leverage in Indices Trading?
What's Leverage in Indices Trading?
The definition of leverage is having the ability to control a big amount of money using very little of your own funds & borrowing the rest - this is what makes the market to attract many investors.
What does a leverage of 1 100 mean?
When Indices Trading using leverage it means that as a trader you can open trade transactions which are larger than if you were using only the amount of money in your account without leverage.
With leverage you can use your money that is in your account to borrow from your broker through what is referred to as leverage. For example if you have a account with $100 dollars - you can use your $100 & borrow using leverage of 1:100, which means that you'll borrow $100 from your broker for each $1 in your account & after leverage you'll have $100*(1:100 Leverage) = $10,000.
leverage is written in form of a ratio:
For example leverage 1:100 or 1:50 or 1:10
Sometimes the leverage can also be written as 100:1 or 50:1 or 10:1 depending on your broker.
This ratio just explains the amount of leverage whether it is written 100:1 or 1:100.
Trading Leverage of 1:100 means you have borrowed using 1:100 & increased your capital 100 times.
Trading Leverage of 1:50 means you have borrowed using 1:50 & increased your capital 50 times.
Trading Leverage of 1:10 means you have borrowed using 1:10 & increased your capital 10 times.
Example:
We shall us this examples to explain what leverage is? If your broker gives you leverage of 100:1 (this is best option to select as the maximum leverage for any account)
This means you borrow $100 for every dollar you have in your account.
To put in another way your broker gives you $100 for each 1 dollar in your account. This is what is known as leverage.
This means if you open a account with $1,000 & your leverage is 100:1, then you get $100 for every $1 you that you have in your account, the total amount which you'll control is:
If for 1 dollar the online broker gives you 100
Then if you have 1,000 you'll get a total of:
$1,000 * 100 = $100,000 dollars
Now you control 100,000 of capital in your account that you can open trades with
Most new traders ask what leverage is best for $100 dollars, or 500 dollars, or $1,000 account? - The best option to choose when opening a live account is always 100:1 & not 400:1.
About Leverage
The more leverage you use the greater the profit or loss
The less leverage that you use the lesser the profits or losses
It's therefore better to use less leverage so that to minimize the risks involved. The higher the leverage used the higher the risk. This is one of the leverage guide-lines not to trade with more than 5:1 leverage.
In leverage guide-lines: It's always advisable to stay below 10:1 which is still high, most professional money managers use 2:1 in their account.
To Learn and Know More about Leverage & Margin - How to Read the Topics Below:
Leverage & Margin Described
What's a Trade Plan? - Written Plan Example Template
Alternatives: Automated EA Trading or Copy and Paste Signals
