x
With major financial regulators throughout Europe, Singapore and now Australia tightening the level of leverage brokers can offer when trading Forex and CFDs, now is a good time to look what exactly leverage is and how it impacts Nigerian traders.
What is Leverage
Leverage involves using borrowed money to enhance the trade that you have on. It increases the users’ buying power, thereby increasing the potential returns when trading is successful. However, Leverage can also amplify the potential losses when price movements are unfavourable and its misuse is one of the most common mistakes beginner traders make.
Suppose you have a $1000 trading account, and you buy a stock priced at $10 with a leverage of 100:1. That $10 stock, after adjusting for leverage, is actually worth $1000. Now imagine what happens when that stock price decreases by 20%. The value of your holding, after leverage is now only worth $800, i.e. a decrease of $200. This means that your $1000 account is now worth only $800. In contrast, should the stock value increase by 20%, this would result in an increase of $200 to your account, resulting in an account now worth $1200.