illustration effet de levier

What is leverage? Information you need to know

Do you want to get started in trading? This is an area that is increasingly popular with individuals. With the expansion of information and communication technologies, trading is becoming more and more democratized. But in order to ensure success in the field, it is advisable to know some concepts and some specific expressions of trading such as leverage. What is stock market leverage? What are the benefits and risks? How to use it when you are a beginner? The following lines take stock.

What is leverage in the stock market?

Generally speaking, thestock market leveragebrokers
As stock market leverage allows you to multiply your gains, it can also multiply them. Which considerably increases the risks. Therefore, it should be handled with caution, because it is a double-edged tool. Many financial products allow you to use leverage. For example, you will be able to use it with SRD, Warrant, binary options, CFD or even Forex. The leverage effect is different depending on the financial products. For the SRD, the maximum leverage is 5. While for the currency market (Forex), the leverage can go up to 200. In order to better understand how the tool works, here -after a numerical example.

If the leverage effect authorized for a financial product is 5, you will be able to invest 5,000 euros with 1,000 euros of initial capital.

Leverage: advantages and disadvantages

As seen above, leverage allows you to invest an amount that is greater than your investment. Most traders use leverage to maximize potential gains. This tool represents an excellent opportunity for those who have small capital to have a larger portfolio. Combined with an effective trading strategy, leverage allows you to accumulate much greater capital gains. Let’s take a concrete example to further understand the benefits of leverage.

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Your initial capital is 1,000 euros. You want to invest in a financial product that is worth 10 euros for a share, with a price that increases by 3%. Without leverage, your earnings are estimated at 30 cents for each share you purchased. Whereas with a leverage of 100, you will earn 30 euros per share purchased. Which is worth a performance of +300%.

But leverage should be handled with caution. Its advantage can also be considered its disadvantage. If you have the possibility of increasing your gains tenfold, you also risk increasing your losses tenfold. It all depends on the rise or fall of stockshere is a very complete article published in the newspaper le parisien

How to use leverage carefully and take advantage of it?

Leverage should be handled with restraint. In order to limit the risks in the event of a market downturn, it is necessary to know the workings. Initially, it is advisable not to opt for high leverage, especially if you are just starting out. For traders, patience is one of the most important qualities to have. Therefore, remember to start slowly by betting small amounts and opt for leverage that is quite moderate. This allows you to understand how the tool works, but also the market. Subsequently, it will be possible to increase investments as you feel more comfortable.

In order to succeed in the field of trading, it is also important to have support. Do not hesitate to follow trading training to help you master the ropes and avoid the various pitfalls. Being accompanied allows you to limit the risks rather than embarking on the adventure alone. When you want to use leverage, also consider setting up automatic orders such as “stop loss”. This will prevent you from losing everything if market prices fall. It is also recommended to diversify your portfolio and choose different leverage. Enough to optimize risk management.