Leverage allows traders to increase their exposure to the market. Instead of paying the full price, leverage allows investors to pay less than the full price but still take a larger position in the asset.
Hence, leverage is actually an investment strategy based on trading with borrowed money. The difference in price is covered by the broker, hence traders only pay a percentage (which depends on the size of the selected leverage) of the full price.
While leverage comes with certain benefits, like the higher exposure to the market, it also bears a greater risk for the investor. This is because the investor is multiplying the potential returns from a certain trade, but also multiplying the potential downside risk.
For example, imagine the scenario where trades want to buy 10 shares of Apple at $100 each. Without using leverage, the investor will be required to pay $1,000 to cover this transaction. Any 10% move higher or lower in Apple shares would result in a 10% gain/loss for the investor.
On the other hand, by using 10x leverage, the investor would be required to pay $100 to open the same position. If a single Apple share goes up by 10%, the investor would earn $100 by investing only $100. However, the trader is also set to lose $100 - his entire deposit in this case - if shares went down by 10%.
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