July 26, 2014

Leverage explained

If  you’re considering spread betting of FX trading, then understanding leverage is a necessity. Leverage is what allows you trade large volumes with just a small deposit.

So to start a trade, you are required to put down a small sum of money which is known as a deposit, margin or account. This small amount of money enables you to trade in large volumes, and this is because of the mechanism of leverage.

Leverage can amplify your gains as well as your losses so it’s important that it is explained and understood.

For example, let’s assume that you invest £100 with a leverage of 200. Should your position lose 10% of its value, then you will actually owe £2,000. This is derived by multiplying 200 by 10 percent of £100.

So you can lose more than your deposit, and it’s important to think about just how much loss you can potentially withstand from trading.