Trading shares with leverage explained
Trading shares with leverage is determined by three factors:
- The price or current level of the share price
- The ratio of the price to the underlying
- The margin
Depending on whether you trade shares with leverage as options or CFDs, we talk about direct trading or effective trading. Before we take a closer look at the different trading options, however, we must first take a closer look at the dependence of leverage on margin.
Advantages and disadvantages for traders
The advantages and disadvantages of trading leverage products are mutually dependent. Figuratively speaking, leverage increases the effectiveness of a trade many times over. For example, a high wave is much more powerful than a small wave. The question is, however, whether you as an investor ride the wave or are swamped by it. The stake itself is small: in the sea you only need courage and ultimately that is also what you need when trading leverage products. A small capital investment can thus lead to you riding the wave and thus earning high profits or being swamped. In the worst-case scenario, the question then arises as to how high the damage is. Can you recover financially or have you suffered a total loss? Like forces of nature, trading stocks with leverage is unpredictable.
Only professional surfers ride the mighty waves. This can also be applied to the trading of leveraged products. Here, too, you should trade losses within limits by not trading leverage products at first as a beginner, but leave this trading to the professionals.
I have put together a quick overview of the advantages and disadvantages.
Advantages of trading shares with leverage:
- High profits are possible
- Low capital investment necessary
Disadvantages of trading shares with leverage:
A loss and knock out is possible
Risks cannot be predicted in advance
Not suitable for newcomers to trading
Conclusion: How lucrative is leverage really? - Suitable for different strategies
What do we learn from this? Stock trading has different facets. As an investor, it is important to know that classical stock trading is mostly a long-term investment, while stock trading as an option or CFD is more short- to medium-term. You can check what is Exness to know more abount CFD. Speculative trading is only suitable for those who can also cope with losses and like to take high risks. The risk profile must therefore match one's own trading.
Trading with leverage should therefore not be underestimated. Although the capital investment is low, the risks are all the higher. For this reason, you should only ever invest the money that you are prepared to lose again. Furthermore, it is not always advisable to strive for the highest possible leverage, as then the risk also goes hand in hand with higher fluctuations in the market and increases.
Finally, it should be pointed out that the margin should always be considered when buying shares with leverage. This ultimately determines the amount of leverage. It is therefore advisable to choose a broker with a low margin when trading leveraged products.