The Leverage role
The ‘Leverage’ – also known as ‘financial lever’- definition is fundamental to understand how the forex market and how its transactions work. In the common language ‘leverage’ stands for the amount of debt used to finance certain activities. A company having more debt than equity is generally called ‘highly leveraged company’. Usually having too much leverage is thought to be dangerous, but many companies use the ‘financial lever’ to expand their activities.
When we want to trade on the forex market, the first step necessary to perform this intention is to contact a specialized broker. The contacted broker will offer two prices for the chosen currency pair: the first price will be the sale price, also known as ‘ask’, while the second will be the purchasing one, also known as ‘bid’. With ‘spread’ we mean the difference between the purchasing and sale price.
Usually, the chosen broker offers a ‘leverage’ too. In order to understand what we mean with leverage in this case, we should think to something like a kind of loan supplied by the broker to the trader, which will permit him to invest a higher capital, even if not actually possessed. The leverage offered inside the forex trade market is usually much bigger than other kinds of loans, this is the reason why Forex trading became so interesting for several traders.
The leverage permits the trader to use a higher amount of money and not only the actual deposit. For instance, if a broker offers a 100:1 leverage, the investor might place just 1000 Euro on his account, while arranging operations and movements for 100.000 Euro. The 1000 Euro deposited by the trader are usually called ‘cover margin’. The cover margin represents a sort of guarantee for the broker and it is the lowest mandatory amount of money needed to open a trading operation.
We should underline that on one side leverage could be synonymous of great profit, while on the other hand it could compromise the investment, leading the entire capital to dissolve. Each investor should be able to estimate the quantity of risk connected to a certain operation, being ready to face the possible trading negative consequences.
Forex Blog: Facilitate Forex
The Leverage role
The ‘Leverage’ – also known as ‘financial lever’- definition is fundamental to understand how the forex market and how its transactions work. In the common language ‘leverage’ stands for the amount of debt used to finance certain activities. A company having more debt than equity is generally called ‘highly leveraged company’. Usually having too much leverage is thought to be dangerous, but many companies use the ‘financial lever’ to expand their activities.
When we want to trade on the forex market, the first step necessary to perform this intention is to contact a specialized broker. The contacted broker will offer two prices for the chosen currency pair: the first price will be the sale price, also known as ‘ask’, while the second will be the purchasing one, also known as ‘bid’. With ‘spread’ we mean the difference between the purchasing and sale price.
Usually, the chosen broker offers a ‘leverage’ too. In order to understand what we mean with leverage in this case, we should think to something like a kind of loan supplied by the broker to the trader, which will permit him to invest a higher capital, even if not actually possessed. The leverage offered inside the forex trade market is usually much bigger than other kinds of loans, this is the reason why Forex trading became so interesting for several traders.
The leverage permits the trader to use a higher amount of money and not only the actual deposit. For instance, if a broker offers a 100:1 leverage, the investor might place just 1000 Euro on his account, while arranging operations and movements for 100.000 Euro. The 1000 Euro deposited by the trader are usually called ‘cover margin’. The cover margin represents a sort of guarantee for the broker and it is the lowest mandatory amount of money needed to open a trading operation.
We should underline that on one side leverage could be synonymous of great profit, while on the other hand it could compromise the investment, leading the entire capital to dissolve. Each investor should be able to estimate the quantity of risk connected to a certain operation, being ready to face the possible trading negative consequences.