What is Leverage?
Leverage in investment is a tool that can increase opportunities for profit or loss by using the same amount of initial capital and consider it as borrowing money from the broker to invest the same amount but with the potential for higher profits or losses due to increased risk.
Advantages and Disadvantages:
Advantages of Leverage :
- Increased Profit Opportunities: Using leverage can increase your chances of making a profit by allowing you to invest less money than the value of the stock or asset you want to invest in without leverage.
- Enhanced Returns: When investing with leverage, a successful investment's returns may be higher than investing the same amount of capital without leverage.
Disadvantages of Leverage :
- Higher Risk: Using leverage comes with higher risks because borrowing money or using leverage increases the risk in investing. If the investment does not succeed, you may incur greater losses than anticipated.
- Debt and Interest Payments: Using leverage often involves borrowing money, which requires repayment of both principal and interest. This may result in future debt repayment obligations.
- Higher Overnight Fee: Using leverage will result in higher overnight fees because higher leverage will increase your exposure, leading to an increase in overnight fees.
- If you buy XAU/USD at the market price is 1860.39 by using an amount of $1,000 with a leverage of 1, = you will get 0.5375 units.
- If you buy XAU/USD at the market price is 1860.39 by using an amount of $1,000 with a leverage of 10, = you will get 5.3752 units.
- In both cases, you use the same amount of capital for investment, but the number of units you hold differs when you use leverage.
- Therefore, if you use a higher leverage, you will have more units, and the potential for profit and loss increases significantly.
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