Trading with leverage on our platform helps to potentially magnify gains. However, it also magnifies losses if the trade is unsuccessful.
For example, if a trader has a £1,000 account but has 20:1 leverage, they can accumulate positions worth up to £20,000. If they make 10% on the £20,000, their profit is £2,000. That’s a 200% return on the £1,000 originally in their account. Without leverage, a 10% return on £1,000 is a £100 profit.
In an opposite scenario, if the trade was unsuccessful and dropped by 10%, the trader’s loss would be £2,000 or a 200% loss on the account’s original value. This also puts them in danger of falling under the maintenance margin level and could even result in a margin call, if the trade continues to fall.
Leverage is frequently used by day traders and swing traders, whereas investors tend to use it to a lesser extent.
This tactic is also referred to as margin trading. For example, if an instrument has a 5% margin, that means you can leverage up to 20:1 on that instrument. You only need to have 5% of the position in the account, which means that a £5,000 index trade only requires an account size of £250 (because £250 is 5% of £5,000).