What is Leverage & Margin?
Leverage means investing with money borrowed at a fixed rate of interest in the hope of earning a greater rate of return. For example, it is called “leverage” because much like a lever, leverage lets you use a small amount of cash to hopefully exert a larger amount of financial power.
Why use leverage?
When companies use leverage it’s called trading on equity. It’s when companies’ issue both stocks and bonds and the earnings per share increase because they expand operations with the money raised from bonds. However, some of the money raised must be used to pay back on the interest of the bonds. If you want to increase the probability of receiving a return on a stock investment, you have the option to leverage a purchase by buying on margin.
Buying on margin means borrowing up to half of the purchase price from a broker—if you can sell the stock at a higher price than what it costs, you have the ability to pay the loan, interest, commission and also have potential to keep the profit.
However, if the stock does drop in value, it is your responsibility to still pay the loan. Similarly, if the shares for less than what were paid, the losses could be larger than if you had owned the stock.
Margin account must be set up with a broker and the required minimum must be transferred to the account. After that, you have the option to borrow close to 50% of the stock’s price and buy with the combined funds.
A bit of trader’s knowledge: despite the potential rewards of buying on margin, it can be very risky. The value of the stock you buy could drop so much that you could lose the entire amount you invested.
What is Forex?
The Foreign Exchange Market or currency market, known informally as “Forex” or “FX” is an over-the-counter trading instrument where one currency is traded for another. Forex offers unique and important opportunities: liquidity, leverage and the flexibility of capitalizing on any market condition real-time. Liquidity allows you to get in and out of the market with ease. Leverage allows you to participate in an investment using only a fraction of the cost (think: home mortgage). All investments allow you to buy the product first, but Forex makes it easy to sell first without owning and buy back lower at a later time. Forex can provide great control during strong or weak economic times. A FX course or FX trading education could help you take advantage of these benefits.
Benefits of Trading FOREX
Minimum capital requirements
Largest volume traded worldwide, Approx. 4 Trillion traded per day
Leverage and liquidity outmatches all other derivatives