Financial leverage and what to know about it

In the CFD and forex industry, the leverage meaning works in the same way to that of having to borrow money in order to buy stock. The online brokers are able to extend virtual credit which is referred to as leverage to their customers. It is the virtual credit which is normally collateralized by the deposit of the customer. It is what enables them in trading in extra financial assets.

It is hard to separate the leverage concept in trading with that of the margin. With margin, it is the amount of money which a trader requires to have to enable them to use it as leverage. In simple terms, it is a good faith deposit which the brokers require before they can be in a position to extend the credit to the trader.

The margin is normally expressed in form of a percentage. If the broker needs 2% margin, then the leverage will be 1:5 and if the margin required is 0.25%, then you will have a leverage of about 400:1

The leverage amount that is offered by the brokers will entirely depend on the guidance of the regulatory. For the EU for example, the guidelines cap it to 30:1.

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