The Power Of Leverage: Global Broker Octa Lays Out The Ins And Outs Of This Trading Tool For Traders In South Asia

The adage that you have to spend money to make money couldn't be truer when it comes to trading. The larger the investment, the bigger the potential payout, and thanks to leverage, the more potential profits you can make. Leverage is a powerful tool but one fraught with potential dangers. That's why Octa encourages investors to get to know the ins and outs of leverage before jumping in to make the most of it. 

What Is Leverage Trading Anyway? 

Leverage trading or margin trading allows traders to purchase currencies with money borrowed from the brokerage. Trading leverage tends to be higher in forex than with stocks. Leverage levels the playing field by giving traders access to opportunities that would ordinarily be out of their reach. Let's say a trader has a leverage ratio of 40:1. That means a trader could take a $40,000 position with just $1,000 in their account. Leverage trading is popular with traders who like to take advantage of small price movements with stocks, currencies, commodities, and cryptocurrencies. 

But that's not the only upside to leverage. Apart from the potential for larger positions leading to higher returns, it supports capital efficiency since traders can maintain smaller cash balances and still access bigger positions. 

Here's an example of how leverage works in a real-world scenario with $1,000 in a trading account. Let's say the trader wants to buy a stock priced at $20 a share. Without any leverage, the investor can buy 50 shares. With a leverage ratio of 10:1, the trader can own 500 shares, resulting in a $10,000 position in the stock. If the stock goes up, the return is amplified even after paying back the loan and a higher commission. Conversely, if the stock goes down, the trader must pay back the broker and absorb the losses – with the losses amplified similarly.  

The higher the leverage, the more risk there is. In addition to bigger losses, margin traders may face a margin call or liquidation. That occurs when the money in the account falls below the margin level set by the broker. In that situation, the trader has to fund the account or close positions to meet the margin call. If the trader fails to do so, the broker could liquidate all the positions, resulting in big losses. There is also an interest charge associated with leverage trading. Traders are borrowing funds from the broker and are charged a fee for that privilege. That reduces the profit or increases the losses. 

To learn the ins and outs of leverage trading, click here.

Knowledge Is Power 

Understanding leverage is important for any trader, especially those trading currencies. The market tends to be volatile, with exchange rates fluctuating based on a plethora of factors, from economic data to global news. It can happen quickly, requiring traders to be ready to enter and exit positions at the drop of a dime. To succeed in the forex market, traders must have a deep understanding of the global markets and technical indicators. They also have to understand the impact of leverage and how much risk they can tolerate. Traders must be willing to continue learning how to use leverage to take advantage of short-term trades. 

It’s the reason Octa spends so much time on its platform educating traders, and is transparent about how its leverage works. The global broker offers clear and transparent terms and conditions for traders and provides understandable terms for how to responsibly use leverage. Octa also has a top-notch customer service team and a slew of resources to help traders, whether they are starting or are well-versed in forex trading, including easy-to-read illustrated user guides, forex trading manuals, and trading tutorials. 

Mitigating The Risk 

The amount of leverage a trader takes on should depend on their comfort level and knowledge. For conservative traders or those just starting out a lower level of leverage may be prudent. For more risk-tolerant, experienced traders, a higher leverage level may be more appropriate.  Either way, leverage can be a powerful tool, worth getting to know, which you can do with Octa. Ready to start trading with leverage? Click here to learn how Octa handles leverage trading on its financial platform. 

Featured Photo By Octa

This post contains sponsored content. This content is for informational purposes only and is not intended to be investing advice.