Leverage

Is leverage risky?

You always need to consider that leverage magnifies the scope for both gains and losses. Although there’s the chance you could book impressive profits, your potential losses are not limited to the margin you have put down.

Your maximum possible loss, viewed as a percentage of your investment, is greater when you trade using leverage. It should be noted, however, that the ultimate risk – the most you could possibly lose – is the same whether you buy the assets at their full value or just put up a margined deposit.

For this reason, it’s a good idea to think of your position in terms of its full value rather than just the amount of margin. You shouldn’t make a leveraged investment unless you’re fully prepared to cover any possible loss.

leverage_is-leverage-risky

Example using leverage

Let’s say BP is trading at 475p per share. You decide to buy 1000 shares in BP at this price.

Your ultimate loss, whether you are buying outright or on leverage, is the same. This is calculated by multiplying the change in share price (475p – 0 = 475) by the number of shares (1000) = £4750. Viewed as a percentage of your initial outlay, however, if you are trading on leverage this is a 2000% loss.

Margin rates and slippage factors can vary, dependent on the regulatory rules governing the country in which your account is based.

Risk management tools

Although leverage inherently involves some risk, there are numerous ways to manage that risk and limit your potential losses.

See our managing risk module for a full range of tools that are available to mitigate potential losses, including tools specifically designed for trading on leverage.

strategy_developing-a-trading-plan_2