So, you’re planning to invest in the stock market as part of the broking service because you’ve read some stories and heard them over the news that you can get rich by getting into the biz.
However, you will need a lot of money to buy as many shares as you can, which is something that some people might not have a lot of.
Some people would then introduce you to what is called as Leverage Trading and you are enticed to get into it. But, hold your horses! Before you go and get into that type of trading, I want to give all the important information first so that you can decide if you want to take the risk or not (and believe me, it is risky). With that being said, I am going to start off by stating what it actually is.
What is Leverage Trading?
To put it simply, Leverage Trading is buying stocks on margin so that you can have plenty of shares for trade. The phrase buying stock on margin, in layman’s terms, just refers to buying stocks using borrowed money.
This borrowed money comes from your brokerage agency and you will have to pay it in due time, otherwise, you’re going to incur some fees.
To make it even easier to understand, say, you want to purchase a car for $40,000. You do not have that much money right now, so you pay it in installments by giving an initial payment of $2,000 and you pay it off every month.
So now, you still have $38,000 that you need to pay (not including interest) and you get into a car accident. Not only is your car totaled, but you will still need to pay what you owed the car company.
So in essence, that is how risky Leverage Trading is. However, like everything in life, there are pros and cons to this which I will discuss in the next section.
Advantages and Disadvantages
Investing in the stock market is already a risky endeavor as it is. Because of its volatility and liquidity, you can gain some and you can even lose some in just the nick of time as well.
The major advantage, and the reason why many people are getting into this is that, well, you can leverage your stock portfolio in the hopes of getting a bigger capital gain.
The more stocks you have and the better the price it gets in the market; you’re going to be earning a lot more than just having a few shares on your account.
However, because of the stock market’s erratic movements and behavior, Leverage Trading is akin to gambling in that you can win big or you can lose big depending on the circumstance.
Now for the downsides. Because you’re borrowing money to buy more stocks, your brokerage firm will require you to put in your money and your assets as part of the collateral, not to mention that you also need to pay them the interest as well.
Aside from that, you will also be required to put an initial deposit. So, say the cost of the shares you’re going to buy is $100,000, you will need an initial deposit if $50,000 because the usual ratio for leverage trading is 2:1.
Leverage Trading is risky because although you can increase your stock portfolio, if the price of it drops to an undesirable level, you could end up earning less than what you’ve anticipated.
And remember, win or lose, you still owe money to your broker which you will need to pay in due time.
So you see where I am getting at? You could leverage buying stocks to your advantage at the expense of borrowing assets from your broker. But the uncertainty that the stock market entails means that you’re walking on soft ground; meaning you will not have a stable base and you could end up hurting your finances in the process.
In conclusion, leverage trading is there but before getting into it, make sure that you know the risks involved, not just the potential earnings.