How Leverage Raises the Stakes
Leverage in the market is also called margin trading, and the basic concept is borrowing money to invest in more stock than you could afford by yourself. Since it involves buying up more shares, it can increase returns. But if you’re unlucky, you could end up actually losing more money than if you had not borrowed anything.
How it works
There are a few technicalities to margin trading. For starters, you have to open a new account called a margin account. Before borrowing, you have to pay a deposit, usually around $2,000. Then you can borrow additional money, which will have other fees and interest rates attached.
Risk/Reward
As you can see, trading with leverage is based on borrowing. And borrowing is always risky, because the money has to be paid back whatever happens, and with interest. As such, the potential to lose a lot of money in a short period of time is pretty high with margin trading. For example, if you invest $1000 of borrowed funds in a company and it’s price drops, the brokerage firm you borrowed from can require you to pay back the loan in full plus interest. So you didn’t make any money from the investment, and then lost money paying back the whole loan.
However, if you invest wisely(and have a little bit of luck), the potential to earn is also high. This is because you are able to buy more shares that your own money could afford. For example, consider a stock priced at $10 per share. If you had $50, you could buy five shares. But if you borrowed another fifty, then you could buy 10 shares. Therefore if the price of the stock rises, you get a greater return that you would have with just five shares.
All in all, margin trading is a good tool to understand. It might not be wise to indulge in as a beginner in the market, but it can definitely have high payoffs. It’s important to understand your broker’s borrowing terms and fees, to help minimize risk.
There is a lot to understanding debt. Learn some more here:
Use A Stock Simulator To Learn To Invest
Paper trading and virtual trading platforms are a great way to learn about investing without risking any money. Simulated investing is a free way to experience the stock market and learn how it works. If you are new to investing, checking out a free stock simulator like Rapunzl is a great way to get started. With simulated investing, you can try out different strategies and see what works best for you without putting any of your hard-earned money at risk. So why not give it a try? After all, it's free.