What is Leverage in Stocks?
Stocks Leverage & Margin Explained
The definition of stocks leverage is having the means to control a large amount of money using very little of your own money and borrowing the rest - this is what makes the stocks market to attract many investors.
What does a Stock leverage of 1 100 mean?
When Trading Stocks using stocks leverage it means that as a trader you can open trade positions that are larger than if you were using only the amount of money in your stocks account without leverage.
With stocks leverage you can use your money that is in your stocks account to borrow from your stocks broker through what's referred to as stock trading leverage. For examples if you have a stocks account with $100 dollars - you can use your $100 & borrow using the stocks leverage of 1:100, which means that you'll borrow $100 from your stocks broker for every $1 in your stocks account & after stocks leverage you'll have $100*(1:100 Leverage) = $10,000.
stocks leverage is written in the form of a ratio:
For example stocks leverage 1:100 or 1:50 or 1:10
Sometimes the stocks leverage can also be written as 100:1 or 50:1 or 10:1 depending on your stocks broker.
This ratio just explains the amount of stocks leverage whether it is written 100:1 or 1:100.
Leverage of 1:100 means you've borrowed using 1:100 & increased your trading capital 100 times.
Leverage of 1:50 means you have borrowed using 1:50 & increased your trading capital 50 times.
Leverage of 1:10 means you've borrowed using 1:10 & increased your trading capital 10 times.
Example:
We shall us this stocks example to explain what stocks leverage is? If your stocks broker gives you stocks leverage of 100:1 (this is best option to choose as the maximum stocks leverage for any stocks trading account)
This means you borrow 100 dollars for every dollar you've in your Stocks account.
To put in another way your broker gives you 100 dollars for every 1 dollar in your stock account. This is what's known as leverage.
This means if you open a stocks account with $1,000 & your stock leverage is 100:1, then you will get $100 for every $1 you that you've, the total amount which you will control is:
If for 1 dollar the broker gives you 100
Then if you have 1,000 you will get a total of:
$1,000 * 100 = 100,000 dollars
Now you control 100,000 dollars of capital in your stocks account that you can open trades with
Most new stocks traders ask what stocks leverage is best for 100 dollars, or 500 dollars, or 1,000 dollars stocks account? - The best option to choose when opening a live Stocks account is always 100:1 & not 400:1.
About Stocks Leverage
The more stocks leverage you use the greater the profits or losses
The less stocks leverage you use the lesser the profits or losses
It is therefore better to use less stocks leverage so as to minimize the risks involved. The higher the stocks leverage used the higher the risk. This is one of the stocks leverage rules not to trade with more than 5:1 leverage.
In stocks leverage rules: It is always advisable to stay below 10:1 which is still high, most professional money managers use 2:1 in their Stocks account.
To Know More about Stock Leverage & Margin - How Do You Read the Topics Below:
Stock Leverage and Margin Explained
