In economics, the term leverage is often used but not everyone knows what it is and what it means, which is why today we at Invest In The Stock will reveal the meaning of financial leverage, to understand by whom and how it is used in practice.
Meaning of financial leverage
Financial leverage is a financial instrument that allows you to move much more capital than is made available as starting capital.
In practice it is a capital multiplier that allows you to invest in the amount of your capital multiplied by as many times as established by the leverage.
What are the benefits of leverage
The advantages of using financial leverage are obvious, in fact this allows access to a much larger investment than the starting capital, thus being able to count on a much higher profit.
However, it must be said that losses are also multiplied by leverage, making it a very risky tool for less experienced investors.
How leverage works
Financial leverage is a financial instrument of debt, and in order to take advantage of it, there must be the agreement of a bank that allows its investors to use it.
In finance it is therefore the bet of being able to obtain much higher profits through the reinvestment of capital.
What does leverage mean?
Financial leverage in business economics also indicates the level of debt of the company itself, which is why it is often also referred to as the “debt level”.
Therefore, the purpose of this financial instrument is none other than the achievement of profit through debt with third parties, banks and credit institutions, clearly with a view to having a constant profit over time that can cover the debt in the medium-long term period.
Financial leverage in online trading
Nowadays, with the arrival of online trading, anyone can start investing, but one must be very careful, because the risk of losing one’s capital is very high, above all thanks to the financial leverage through which the trading platforms give the possibility of multiplying the value of its capital.
In trading, the risk is as high as the financial leverage itself which multiplies the losses or any gains, but in this case the financial leverage is virtual and there is no risk of getting into debt, this is because in online trading you invest in CFDs.
Precisely for this reason it is not advisable to trade with a very high financial leverage for all those who are not experts in this sector, and even for the latter the risk is still present.
In principle, brokers provide a leverage of 20:1, this is to avoid large losses of money with a higher leverage, and thus protect their investors.
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