What is financial leverage?

Leverage or leverage (English) financial leverage) is a mechanism very popular on financial markets, especially when entering into transactions on currencies and derivatives. The main purpose of implementing this solution is giving the opportunity to increase the profitability of operations by using less financial resources than a standard transaction would require. Physically, the funds do not have to be transferred in full between the parties. Ultimately, only the difference between buying and selling is accounted for. Therefore, transferring the entire amount of funds is unnecessary, and the transaction is secured with the so-called margin (from Margin).

What is the impact of financial leverage?

As I mentioned earlier, the lever directly influences only on the amount of funds involved that will be blocked on the account against an open position. The bigger the leverage, the less blocked means.

READ NECESSARY: Experienced customer and 1 lever: 100. We're checking the procedure

If our account has a leverage of 1: 100, it means that for each unit of currency from the value of the transaction it is enough to involve 100 times less funds.

Examples:

1. The transaction value is EUR 100 -> the security deposit will be 000 times less, ie EUR 100.
2. The account leverage is 1: 500, and the transaction value is USD 50 -> margin will be 500 times less, or 100 USD.

What leverage does not affect?

Often, beginners think that the siphon also affects other things such as the value of pips or the amount of profit or loss. Indirectly and yes, it can have an impact but directly NEVER . Leverage affects only and exclusively margin amount. If we use more leverage at the same volume, profit or loss will be the same. Only the amount of funds blocked on your account will change. The pip value depends on the currency instrument, deposit currency and, above all, the transaction volume. However, the amount of profit or loss depends on the number of pips that we have earned or lost.

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What leverage is the best?

There is no such thing as the best financial leverage. Lewar is good in itself because it gives us the opportunity to open the same position using less funds. Or otherwise, it gives us the opportunity to open up a larger position using the same amount of funds.

It can be concluded that the greater the leverage the better. And it actually is. This means that we do not have to hold a large deposit on the broker's account, only put a part of it in the bank on the deposit and if there is a need to pay the funds on the account.

The greater the financial leverage, the greater the risk?

Not necessarily. Lewar is not risky in itself. He gives us only the opportunity to open a larger position than in the absence of a lever. It can be risky for an investor who does not understand how a lever works, how to use it and make ill-considered decisions, for example by opening too much position in relation to the funds held. A smaller siphon or lack thereof can be a kind of a brake that will limit the investor in his ill-conceived operation, however, it is not the lever itself that is the risk but the unskilful use of it.

The principle here is: "If you don't understand how something works, don't use it".