Leverage in stock trading

Leverage on the stock market

Give me a strong lever, and I will move the stock market. This paraphrase of Archimedes words fits like a gleam for many beginner investors on the stock market. Why only beginners? Because the investor who has this principle has two options ...

Either she will lose money, she will be frightened of the stock market and she will give up, or she will make conclusions and change her attitude. Then you have the opportunity to become an effective and experienced investor.

What is leverage?

Imagine a stock price. It costs $ 25,000 and you pay only 5% for it, which is $ 1250. However, he earns 25000 for you in the market. Great deal!

Just count the profits. When this value is only 10%, you will come in a $ 2,500 portfolio, which is actually twice as much as you are investing. It fascinates. It works on the imagination and evokes emotions. Such instruments are, for example, FW20 contracts.

However, the investor without experience usually forgets about the other side of this medal. Since earning 10% results in a profit of $ 2,500, it is important to remember that a loss of 10% results in a loss of $ 2,500. In that case, instead of your initial $ 1250 investment your account is zeroed out and you have an additional $ 1,250 in debt.

Next you like this perspective? It hurts and such learning is expensive. Much better to assimilate lever defects without having to bear this price.

What if the instrument has a leverage?

The method is one and it is so simple that it raises objections. No matter how big leverage you have, only you decide how much you will use it. Of course, no brokers or brokers do not give you the tools to reduce the leverage. But you can always do it on your own.

Since you pay 5% for the x20 leverage. To get a smaller leverage x5 you have to invest 20% of the capital instead of the required 5%. This means that for a single contract of the above example you are spending $ 5,000.

The bad news is that the brokerage office will charge you a deposit of 1250zł. The remaining 3750 USD you secure the second deposit - mental. It is only in your head. You have to know which money is already reserved and under no circumstances can you use them for other orders.

That is why it is difficult. It requires planning and then relying on yourself. It requires the iron sticking to the rules and the plan despite the fact that the inner voice says to you: "After I have 5000 I can buy 4 contracts and not 1. After all, my money is to earn and not to lie on the bill." Listening to or ignoring this voice is a distinction between beginner and experienced investors.