Trading with Leverage – Pros and Cons

Are you contemplating trading? Well, trading might provide you with abundant wealth, but it can be a bumpy road of tremendous losses and debt traps.

Stock prices change every day. The stock market is like a roller coaster ride (it goes up and comes down superfast). On that note, I would like to mention a Great quote: “Stocks always go down faster than they go up, but they also go up quicker than they go down”

Do you know what trading with leverage is? Let’s find out.

Trading with Leverage

What is Leverage?

Leverage sounds tricky; I will explain it to you in simple terms- so, Leverage is where a trader borrows money from a broker for financial service to increase potential returns through victorious investments.

But keep this in mind: the higher the leverage, the more is the financial risk. Considering this, it also depends on you, how much money you need to invest, and the type of market you will be trading.

Also Read: Margin Trading – A boon for retail traders

How Does Trading with Leverage Work?

Leverage trading is where a trader uses shares in trading more than they can afford to. It’s not a wrong decision when you want to invest by leverage, and you know what you are getting into, then, by all means, go ahead.

But if not, beware of the risks associated with it. And if you don’t have experience in trading methodologies and want to start making money by trading, then it’s better to be familiarized with trading strategies or you can join a Stock Market Course to become a pro in trading.

How to trade stocks with Leverage?

The rising value of stocks allows investors to capitalize by investing in giant companies and high-quality markets. Many investors trade stocks through cash. But for that, you need to have enough money in your account for buying shares in the stock market.

Professional traders borrow money to invest in stocks, which benefits them and grants them access to more money than they have in their accounts. And this is where traders can invest with leverage or, as you can call it, leverage trading.

Example of Leverage Trading

For example, suppose that the price of the stock of XYZ Corporation is 100. You are sure that the price will rise, and you want to open a buying position for 10 units which mean that you would require 100*10 = 1000 as the capital

However, with leverage trading, you’ll need a fraction of this amount. Suppose your broker provides 5X leverage. Then you’ll only require 1000/5 = 200 as your capital to initiate this trade

Pros of Trading with Leverage

  • More Buying Power: The leverage in trading can turn out to be profitable and helps in boosting the buying power, which in turn allows you to make more money through trading.
  • Flexibility: When you want to invest in a highly-priced stock through trading, leverage allows you to invest and gives an advantage to not miss out on valuable, marketable opportunities.

Cons of Trading with Leverage

  • Maximized Losses: Leverage in trading can help multiply the buying power; it can also misfire. So, a trader needs to leverage wisely and trade stocks with limited risks.
  • Debt Trap: It is good to have a calculated trading plan, but just like everything else in the world, trading is a business, and sometimes businesses fail too. Then you will have to pay off the debt and pay the interest amount as well.

The Bottom Line

All in all, Leverage can be considered a boon and a curse simultaneously as leverage can be a valuable tool in trading. Once you learn how to manage leverage and trade wisely, you can use leverage correctly and generate a good amount of money.

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