If you thought online trading was only for big budgets, think again! Thanks to the leverage system, it is indeed possible to trade and pocket large profits, even with only a small amount of capital. How does it work? Here are the essential points to know
The principle of leverage
Most Forex and CFD brokers nowadays offer the possibility of using leverage. This system has been set up to offer traders the opportunity to bet big, even if they do not have enough money in their trading account. This is the principle: for example, you have a capital of €100 in your account, but you want to invest a larger amount. Your broker then grants you a kind of loan, which you can use directly to trade online.
With a leverage effect of x100, you can bet up to 100 times your capital, i.e. up to €10,000. You also have the option of using a larger lever to bet even higher. Generally, brokers offer a maximum leverage of x400 like eToro, which will allow you, with your €100, to invest up to €40,000 in trading. It should also be noted that the accessibility of this leverage effect may be limited depending on the conditions applied by the broker. The value of the possible leverage also varies according to the asset concerned.
The risks to be taken into account
However, despite the possibility it offers, the use of leverage has a definite disadvantage. Indeed, if the value of the investment increases, it is not only the gains that will be increased, but also the losses. Thus, if there are fluctuations in the exchange rate and the result of your investment is negative, you will lose the amount x leverage.
For example, with an initial capital of €100, you would have lost €2 in normal times, but using a leverage effect of x100, you will lose 2 x 100 = €200. That is twice your initial capital, which automatically puts you in debt. As mentioned above, the leverage system works, indeed, as a kind of borrowing and, like any borrowing, it must be repaid.
Thus, using leverage with small capital can be interesting, but remains just as dangerous. The more leverage used, the higher the risk. Caution is therefore called for and no decision can be taken in haste. It is essential to put in place a well-defined strategy to be systematically applied for each position taken.