What is Leverage?
Leverage is a trading mechanism available on the platform which allows its users to trade with borrowed funds from the broker, so you only need a relatively small percentage of the actual money amount you are willing to trade. This essentially increases the amount of initial investment into the trade due to the higher market exposure, allowing you to amplify potential gains by increasing the total value of the transaction, in case your strategy is profitable.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
How does it work?
Let’s consider an example. A trader opens a trade and invests 1000$ into a long stock position with no leverage at all (i.e. x1 chosen in the leverage settings). Then in case of a beneficial price increase in stocks of 1% your profit increases proportionally by 1% or 10$, if translated into a monetary equivalent.
If on the other hand, you decide to use a higher x5 leverage and the stock price increases favorably by 1%, your profit will be 5%, resulting in 50 dollar monetary gain. Leverage here allows you to use credit from a broker and open a bigger position with less that the full amount needed for such an investment.
But if the price goes in the wrong direction, your losses will be amplify accordingly. The total amount lost however will not exceed the amount you originally invested.
Leverage on eToro
Let’s consider stocks. Once you decide on the asset you want to purchase, click on the leverage option. eToro provides a choice of x1, x2 and x5 leverage for trading, both for the long (buy) and short (sell) positions in stock trading.
Other assets offer different levels of leverage. Some assets allow for a higher level of leverage, while for others the leverage is restricted to fewer options on the platform.
Currency options for example, offer leverage levels of up to x30, as you can see from the image below.
Cryptocurrencies allow x2 leverage, while commodities can be traded using x10 leverage and so on.
Note of caution
Although leverage offers many benefits as an option by increasing your potential profits, it can likewise amplify your losses too. Leverage should be used with caution and understanding of the risks involved in leveraged trading, especially in the periods of increased market volatility. Make sure to familiarize yourself well with the key trading basics and strategies, as well as practicing sufficiently, before putting your own money at risk with leveraged trading. But once you learn how to trade using leverage, it may offer you quite substantial potential benefits in your trading as it allows for great flexibility and can be used in your personalized strategy.
Beware of the margin call, which happens when the value of your account falls beyond the allowed threshold. There is a certain minimum amount of funds that need to be available on an account (minimum margin) for a trader to be able to use credit from broker in your trading. Once the cash amount falls beyond this minimum, you will be asked (via a notification) to add additional funds into your account to comply the credit requirements of the broker and cover for the risks associated with market exposure, in case your open position results in losses. This is because the broker needs to ensure a trader is able to repay the borrowed funds.
Maintaining a sufficient amount of cash on your account, also referred to as Cash Equity, will help you avoid a margin call. In case you cannot afford to deposit more, there is also an option to close your positions.
Enjoy trading and do not forget about the associated capital loss risks. Good luck!
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eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Past performance is not an indication of future results.
eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro.
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