In a platform like the stock market, everyone wants to make a profit out of the trade. Otherwise, what is the point of it to start with? Some go even a step further to find a way to make a bit more than they can afford to invest themselves. This is where leverage comes in.
What is it precisely?
To put leverage meaning into a precise definition, leverage is the practice of borrowing money from a different body to invest in the trade to amplify its return. But there is a risk because when the return is being levered, the rate of gain or loss, whichever it has to be increases simultaneously. With leverage, traders are able to maximize the size of their trades to make more money. However, this comes at a cost of risking more than you could afford in order to gain more. For example, if you have $10 in your eToro trading account and you want to buy Apple stocks. The platform accepts a minimum investment amount of $50 but since you only have $10, you will need to borrow an additional amount from this broker in order to trade. In this case, you need to use a leverage of X5 in order to meet the minimum requirement. That’s how leverage works.To trade with leverage you have to be aware of the risks involved with using borrowed funds from your broker in order to amplify your buying power while paying a cost for doing so. Some common ways that leverage is used are when trading stocks, futures, and other financial instruments among others.
How to use leverage indirectly?
- Investors can analyze the balance sheet of the companies which have leverage daily.
- One can utilize the statistics of return on equity, equity debt, and return on capital employed.
- This evaluation narrows down the chances and helps to determine whether to approach for indirect leverage or not.
The easy way
Research and analysis of the record sheet might be straining or just not preferable for some individuals. They can invest in mutual funds or exchange-traded funds that use leverage. This way, one can make use of leverage indirectly without having to go through the evaluation procedure.