LEVERAGE

Leverage is an investment technique in which you use a small amount of your own money to make an investment of much larger value. In that way, leverage gives you significant financial power. Leverage is the ability to trade a large position (i.e. a large number of shares, or contracts) with only a small amount of trading capital (i.e. margin).

•	Stock Market provides leverage at 2:1.
•	Commodities market provides leverage at 10:1.
•	Currencies market provides leverage at 100:1 (or 200:1).

Power of Leverage

For example, if you borrow 90% of the cost of a home, you are using the leverage to buy a much more expensive property than you could have afforded by paying cash. If you sell the property for more than you borrowed, the profit is entirely yours. The reverse is also true. If you sell at a loss, the amount you borrowed is still due and the entire loss is yours.

Leveraging can be risky if the underlying instrument doesn't perform as you anticipate. At the very least, you may lose your investment principal plus any money you borrowed to make the purchase.

With some leveraged investments, you could be responsible for even larger losses if the value of the underlying product drops significantly.

Every market uses leverage to a certain degree. Many people are familiar with the stock market, which permits trading or investing on the margin. And leverage is absolutely necessary for commodities trading. The big attraction in currency exchange is that it offers the highest amount of leverage for any financial market.

As you can see, the amount of leverage available in the stock and commodities markets pales in comparison to the leverage available in the currency exchange (Forex) market. This fact attracts traders who have limited funds and want to get more trading power for their money.

Most online brokerage houses will even offer 200:1 leverage for mini accounts! This allows small traders the opportunity to make huge profits using a relatively small investment. Naturally, this powerful trading tool is very attractive to small investors or traders.

What does this mean? With a leverage ratio of 100:1, an investor can hold a position worth $100,000 using only $1,000 of his own money! It's easy to see the increased buying power that the currency exchange market holds in comparison to the stock and commodities markets. This sounds like a great tool for traders, but there are risks with amount of buying power.