What is Leverage?
Leverage means using borrowed capital to increase the size of a trade, which can lead to bigger gains or losses. Leverage also lets traders open more positions, spreading risk across their account therefore diversifying it. CFD leverage can vary, with ratios like 400:1 or 2:1, depending on the asset traded. But remember, leverage increases risk – while it boosts potential gains, it also raises the risk of potential losses.
What is Margin?
Margin allows traders to use leverage by borrowing (money) from a broker to open bigger positions than their available capital permits. For instance, if you wanted to buy 100 Tesla shares at $900 each, it would require $90,000. But with margin, some brokers might allow you to open the same position with only 5% or $4,500. This frees up extra capital to open more positions.
What are the Risks?
Margin and leverage offer very appealing benefits, like increasing your trade's return by 400 times. However, they come with risks. That same 400x trade can magnify losses just like wins, making it a double-edged sword. Additionally, leveraged trading can lead to overnight interest charges, which may accumulate over time. If a broker lacks negative balance protection, leverage could result in a loss exceeding the account balance, requiring additional funds unexpectedly. (It's essential to understand and manage these risks when using margin and leverage in trading.)
