In trading, leverage allows you to control a larger position with a smaller amount of capital. It's essentially borrowed money that magnifies your potential returns, but also your potential losses
When you trade with leverage, your broker provides you with a portion of the funds needed to open a trade. For example, if you use 1:100 leverage, for every $1 of your own capital, you can control $100 worth of assets.
Example using FNmarkets:
Let's say you're trading on the FNmarkets platform and you believe the price of EUR/USD will increase.
Scenario 1: No Leverage
You want to open a position worth €10,000.
You would need to deposit €10,000 of your own capital.
If EUR/USD moves up by 1% (€100), your profit is €100 (1% of €10,000).
Scenario 2: With Leverage (e.g., 1:500 on FNmarkets)
FNmarkets offers a maximum leverage of 1:500 for certain forex pairs.
To open a €10,000 position, you would only need to put up a fraction of that amount as margin.
With 1:500 leverage, your required margin would be €10,000 / 500 = €20.
If EUR/USD moves up by 1% (€100), your profit is still €100. However, this €100 profit is generated from an initial capital outlay of only €20. This represents a 500% return on your invested capital (€100 profit / €20 margin).
Important Considerations:
While leverage can amplify profits, it also amplifies losses. If the market moves against your position, your losses will be magnified in the same way your gains would be. FNmarkets, like other brokers, will have a margin call policy, where if your losses reach a certain point, you may be required to deposit more funds to maintain your position, or the position may be automatically closed (stop-out) to prevent further losses exceeding your account balance. Always understand the risks associated with leverage before trading.