What is Leverage?Leverage in trading
leverage is a concept that enables you to multiply your exposure to a financial instrument, without committing the whole capital necessary to own the physical instrument.
When trading using Leverage you only need a fraction of the total value of your position, the rest is effectively lent to you. Profits and losses are based on the total size of the position, so the end result of a trade can be much larger than the initial outlay, in terms of profits or losses.
CFDs are a form of leverage trading. The amount needed to open and maintain a leveraged trade is called “the margin”. Trading using leverage is sometimes called “margin trading”. In general, the term leverage is used when a small change in the price of the CFD is amplified into a bigger change so that the CFD offers an “accelerated” return/loss.
Why Use Financial Leverage?
Leverage is used for these basic purposes:
- To expand a firm’s or an individual’s asset base and generate returns on risk capital. This means that there is an increase in ROE and Earnings Per Share.
- To increase the potential of earnings.
- For favourable tax treatment, since in many countries, the interest expense is tax deductible. So, the net cost to the borrower is reduced.