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  • Leverage & investing – THIS IS WHAT YOU NEED TO KNOW!
  • Leverage & investing – THIS IS WHAT YOU NEED TO KNOW!

Leverage & investing – THIS IS WHAT YOU NEED TO KNOW!

What does leverage mean in investing?

When you start to delve into investing, you will undoubtedly come across the concept  of leverage  . What exactly does this leverage entail? And how do you use it to your advantage? In short: by means of leverage, you can  make  a  large investment with a small amount  . This makes it possible for you as an investor to profit to a greater extent from fluctuating price movements. This allows you to realize larger profits – but also losses. 

What is leverage?

The concept of leverage and leverage are the same. A leverage is shown as a ratio. Think of the scale 1:50 when you read a map. A leverage number is therefore always shown as 1:100 or 1:2500. This number is called the multiplier of the leverage. If a leverage multiplier of 1:50 is stated, this means that for every euro invested, you place an investment of 50 euros. For example, do you want to invest a maximum of €750? Then with a multiplier of 1:50 you can place an investment of (€750 x 50 =) €37,500. This clearly shows that you can make a large investment with a smaller amount by means of leverage.

The leverage in a nutshell

If no leverage is applied, you only profit from the increase in the price or you lose from a decrease in the price. If leverage is applied, you can speculate more easily on a small price movement. For example, if you buy a share for €25, then:

  • Get a profit of €2.50 with a 10% increase without leverage
  • If you lose €2.50 on a 10% drop without leverage

If leverage is applied, you will achieve completely different results. This means that much larger profits and losses can be achieved with relatively small price movements. If a leverage multiplier of 50 applies, you can make an investment worth €1,250 with an investment of €25. The results are then:

  • With a 10% increase you will make a profit of €125
  • If there is a 10% drop you will lose €125

As you can see, the result with leverage is much higher. Always keep in mind that this also applies to losses. You can profit from larger profits, but the chance of a considerably larger loss is also present.

Investing with leverage

As an investor, you can invest with leverage via a so-called CFD, Contract For Difference . By means of CFDs, you can make investments with a larger amount than is in your investment account. Via a CFD broker, you can take a long position or a short position in a CFD. 

Applying leverage is fully automatic. When you take a CFD position, you do not become the owner of the underlying product. The CFD broker finances your investment, as it were, and you pay financing costs for this. You buy for a larger amount than your position and profit from the profit. Be careful! Leverage can also work against you. This means that not only can your profit be greater, but also your loss. Leverage works both ways.

The risk of leverage

Achieving higher returns often comes with higher risks. This is because you can make a larger investment with a relatively small amount. This investment can turn out well, allowing you to profit from high profits. However, this investment can also have negative consequences. The leverage can also work against you. This means that you can suffer a large loss with a small investment. Every euro in the price drop then entails a higher loss. It is therefore important to always deal responsibly with investing. Make well-considered choices and do not take risks that keep you awake at night. Take your time to gain experience with investing so that you can optimally use this useful instrument to earn money. It is also certainly not unimportant to choose a suitable broker that fits your investment strategy.  Compare the different online CFD brokers  and decide which broker is most suitable for you!

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