Two elderly gentlemen were briskly rocking on the porch of a retirement home. Charles suddenly exclaimed, “Leverage, James, leverage! I haven’t thought about it in years!” He then rammed his cane under James’ rocking chair, overturning the rocker and its occupant.
Leverage is a concept of influence. For instance, a broker is a person who persuades, or encourages people (investors) to invest their money with the hope of increasing it, while accepting the risk that they may not increase their money, but could lose their investment. The broker sets the margin requirements that determine the investor’s maximum leverage; the broker does not set the investor’s leverage — just the maximum the investor can use. A responsible trader ordinarily never has to worry about the maximum, because the leverage the trader uses is entirely at his/her discretion — usually far below the maximum set by the broker. In other words, the margin requirement is set by the broker for protection against traders who would borrow more than their collateral would uphold.
Leverage is used by investors who lever their investments by using several means which include options, futures, and margin accounts. Companies use leverage to finance their assets, I.E., using debt financing to invest in business proceedings in an attempt to increase shareholder value, instead of issuing stock to raise capital.
Leverage is the use of credit or borrowed funds to increase one’s conjectural potential and increase the rate of return from an investment, as in purchasing securities on margin, although it can also increase the rate of loss by the same factor. Margin is the amount of collateral a customer deposits with a broker when borrowing from the broker to purchase securities. Leverage depends on the size of the trades that can be made to the account equity, as long as the maximum leverage the broker allows, is not surpassed. This value is commonly shown as a DEBT: EQUITY ratio.
The old man asked Johnny what he was looking for. Johnny replied that he lost a quarter and couldn’t find it.
“Where did you lose it?” The old man asked.
“Down there,” said Johnny, pointing at the dark end of the street.
“Why are you looking here?” The old man was baffled.
“Because,” explained Johnny, “there’s a streetlight here!”
There is no sense in searching in the dark for information about Leverage in Forex. Come into the light!
Leverage in Forex permits boosting the power of trading accounts by allowing traders to operate larger funds. For each tangible dollar funded by a trader, Forex brokers offer a leverage up to 400:1 or even higher, which heightens traders buying/selling capabilities while trading Forex. Without leverage, only those traders with really large accounts can afford trading Forex. Leveraging their investments, is often the only way other traders can participate in Forex currency trading and are still be able to operate large trading lots while making reasonable profits from trading Forex. Leverage allows a trader to trade money the individual does not possess.
Someday, when feeble-you are rocking in your chair, and the person rocking next to you has a cane handy, beware of learning Leverage the hard way!