Leverage definition

Leverage is a concept that can enable you to multiply your exposure to a financial market without committing extra investment capital.

In investing, the amount needed to open and maintain a leveraged trade is called the margin. Trading using leverage is sometimes referred to as margin trading.

Leverage is available on several financial products, including spread bets, CFDs and forex trades. When trading using leverage, the provider will only ask for a fraction of the total value of your position: the rest is effectively lent to you by the provider.

Profits and losses are based on the total size of the position, so the end result of a trade can be much larger than the initial outlay. Losses can end up exceeding the initial deposit.

Leverage example

You want to open a position on JB Hi-Fi. With IG, you will be margined on the total consideration of the trade.

If the stock is margined at 5%, shares are valued at $22 and you want to trade 500 shares, your margin will be $550. This is because margin is calculated as

Number of shares x share price x margin percentage

So 500 shares x $22 per share x 5% = 550.

Therefore, when trading on leverage, in order to obtain an exposure equal to 500 shares in JB Hi-Fi, you only need to hold a deposit of $550 instead of buying $11,000 worth of shares in the underlying market.

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