Pump up your trades!

Leverage Trading: 3 Reasons To Power Up Your Trades

May 4 by Stephanie Tan

What is leverage trading?

A good analogy for leverage trading would be this: Remember when you were a kid and you tried to fry ants under a magnifying glass? (Well, if you were as terribly wicked as I was as a child.)

The glass was enabling you to increase the heat of the sun and concentrate the sun’s rays on a very small area, so that you could become the neighbourhood’s tiniest arsonist.

Similarly, traders use leverage to magnify their returns. Leverage trading allows them to increase the size of their trades using a relatively small amount of money. It’s one of the main advantages of CFD trading – it makes the markets more accessible to the average person who doesn’t have a ton of spare cash lying around.

Where those damn profits?!

Leverage is usually expressed as a ratio. So if your leverage is 5:1, that means you can open and control a $5,000 trade with just $1,000 in your account (typically called the “margin”). The balance comes from a kind of loan that’s provided by your broker. They get paid a commission based on the size of the larger position, so it’s a win-win!

Why leverage trading instead of just putting in your own money?

As we just explained, leverage allows people to make large trades without having to put down too much of their own money.

But what if you’re flush with cash? Why wouldn’t you just invest your own money rather than ‘borrowing’ from the broker?

Well, there are three perks that come with leverage trading:

  1. You don’t have all your money tied up in just one or two products. Some investors love leverage trading because it frees up their funds. So they can invest it in a bunch of different things and get the most out of their capital.
  2. You can amplify potential profits. Here’s an example: Let’s say that the latest quarterly figures for Heineken will be released soon. Based on your research, you think it’s very likely that its stock will go up, so you put in £1,000. Once the numbers come out, the share price indeed rises by 5%. The £1,000 you put in also increases by 5%, or £50. But if you were trading with a leverage of 5x, the value of your trade would actually be £5,000 instead of £1,000. So instead of earning £50, your profit would now be 5 times higher = £250. KA-CHING!

3. You can use leverage trading to turn small price changes into big results. For example, you already know that exchange rates go up and down every damn day. However, the differences can be pretty small, like mere fractions of a cent. This is why leverage trading is very popular with forex traders – they can turn these micro-fluctuations in exchange rates between two countries into potentially huge gains. In some ways, it’s like the Viagra of trading…

And now, for the flipside of leverage trading…

Leverage trading can be just like Autocorrect – while it can work for you, it can also work against you.

Didn’t see that one coming

If leverage trading can be used to magnify profits, be aware that it can also magnify losses. Going back to that Heineken example: If you had been wrong about its share price going up after its earnings announcement. Instead, the stock took a 5% dive – you would’ve lost your £50. But if you had opened that position with a 5:1 leverage, your loss would now amount to £250.

This is why the excessive leverage can be super risky. There are some brokers out there offering 1,000:1 leverage trading! You can end up losing a lot of money very quickly, so start small and get some experience before you crank that thing up.

Practice leverage trading in a safe way

With BUX, you can never lose more money than you put in. So if you invest £1,000 in Heineken in our app, using 5x leverage, it’s like you invested £5,000. But even if Heineken’s share price goes tits up, you can only lose a maximum of £1,000. Why? Because your trade is automatically closed when it falls below the actual amount of cash you put in.

So BUX gives you the opportunity to increase the value of your trade without ever running the risk of losing more than your initial investment. Sweet, right? Get to know more about leverage trading with our award-winning app.

Written by

Stephanie Tan

Nomadic wordsmith who has dabbled in public relations, media and now, casual trading. She may not have a head for numbers but she enjoys doing cyber-sleuthing on companies and loves being immersed in all things tech. Connect with her on BUX: @Stephtrades

Disclaimer: All views, opinions or analysis expressed in articles are that of the author and do not represent the views of BUX. Neither BUX nor the author provide financial advice and these articles should not be construed as such.

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