Leverage in trading: how does it work?
Published on: 02/11/2021 | Modified on: 16/09/2022
Leverage is the use of a smaller amount of capital to gain exposure to larger trading positions, also known as margin trading. It can be used across a variety of financial markets, such as forex, indices, stocks, commodities, treasuries and exchange-traded funds (ETFs). As an example, leveraged stock trading is an appealing choice for investors that don’t want to pay the full value of the share upfront or take ownership of the asset. In this article, we will explain what it is, how it's calculated and how you can use it to gain enhanced trading exposure across 12,000+ instruments on our trading platform.
- Leverage and margin are essentially the same thing
- It provides greater exposure to the financial markets, as you don’t need to pay the entire trade value upfront
- Examples of leveraged products are spread bets and contracts for differences
- It is calculated by a ratio, such as 5:1 for stocks (which is relatively low) or 30:1 for forex (which is relatively high)
- If trades are successful, profits may be magnified but if they are unsuccessful, losses will be magnified by an equal amount