Most of the traders like to trade on cash. The difference between the amateur and professional traders lies in the process of thinking. Suppose, amateur trader wishes to buy $50,000 worth of stock, he must possess $50,000 cash in his pocket to do so. On the contrary, if a professional trader would need same stock he would only need approximately $15,000.
Leverage
Leverage is depositing relatively small cash, and then for this small amount borrowing a larger amount of cash. The only thing leverage is related is the margin. For example, by taking into account EUR futures market the minimum amount that can be traded is $125,000. By using leverage, the same trade can be done by a cash of $6000. $6000 is actually the margin set by exchange for the EUR futures market. Margin is the minimum amount of cash a trader must have in order to trade using leverage. The remaining amount, i.e. $119,000 ($125,000 – $6,000) is called the leveraged amount.
The Basic Threat
It is mostly believed that trading using leverage is extremely dangerous. It is considered the faster way of losing more amounts of money than the one the traders started with. The financial agencies have added fuel to the thinking by giving harsh warnings. The harsh wording can be seen by the following warning.
Trading using leverage carries a high degree of risk to your capital, and it is possible to lose more than your initial investment. Only speculate with money you can afford to lose. These warnings are the primary ways which keep amateur traders to avoid risking their money. However, the warnings show only the darker side of the picture.
Brighter Side of a Picture (Use of Capital)
The professional traders look at both sides of the picture. The reality is that professional trader’s trade using leverage on daily purpose, because it is the efficient use of their capital and quite helpful.
