What is leverage?

In simple words, leverage is referred to as a borrowed fund that is used to invest with an expectation of making a profit in the future which would be more than the debt and the interest that would be paid on it. In trading, investors use this mechanism to enhance their exposure and position size in the market that they would not be able to do with their current balance alone. The margins are usually set in the leverage system which means that the trader would be able to borrow a certain amount of money after paying a certain amount of cash and it can be used only to trade.

Benefits of leverage:

  1. A trader or investor can invest in the markets that would otherwise not be accessible for them. 
  2. With leverage a trader can possibly generate income using others’ wealth.
  3. It enhances the financial potentials for a trader hence, a trader has an opportunity to gain more profit.

Risks of leverage:

If trends are going against one’s predictions, it can bring big losses which can be more than investment price results in more debt at the end.