Many professional traders usually trade using leverage. Traders only need a small percentage of the amount that they want to trade. Yet, there are risks of trading with leverage.
For instance, if they want to place a trade worth of $125,000, they can make it with approximately $6,000 cash in their forex account.
Leverage is related to margin. Margin is the minimum amount of cash that you have to allow to trade using leverage. Within the example above, the $6,000 is the margin requirement and the remaining $119,000 is the leveraged amount.
However, there are some risks if you place stock trading with leverage.
Pay attention to leverage warnings for stock
Many people, especially the non-traders and new traders, think that trading with leverage is dangerous. They also think that with leverage they will lose their money, faster, due to leverage warning.
Financial agencies and brokerages usually provide that leverage warning. The function for that warning is to remind traders that trading with leverage carries a high degree of risk to their capital.
It is possible for them to lose more than their initial investment. Therefore, traders should have the capability to speculate the amount of money they can lose, first.
It is a legal and efficient use of capital
The reason for many professional traders trade using leverage is because it is an efficient use of their capital. With a closer look, there are many advantages to trading using leverage, while there are minimal disadvantages.
One of the advantages is trading using leverage allows traders to trade unavailable markets. Besides, it allows them to trade more contracts (or shares, forex lots, etc.) than they would otherwise be able to afford.
Trading using leverage does not is increase the risk of trade; it is the same amount of risk as using cash.
