Financial leverage and uses
We stand a lot and many of us in front of the term financial leverage and use, but many of us do not really know what is the real financial leverage which leads in many cases to problems during trading.
To illustrate this, I explain the following example:
Suppose you want to invest in a property which expects its price to rise in two months by 20%, but you do not have the value of this property, but have an amount equal to 10% of the property value
What can you are doing in this case is to go to a bank and request a loan covered by the value of the property where he will buy the property and if the price rose Vstqom sold later and repayment of the loan and make a profit equivalent to 20% of the property and practically value equivalent to 200% of the share owner value.
To illustrate larger numbers Suppose that your capital is $ 10,000 and the value of the property is $ 100,000 in this case you buy the property after you get a loan worth $ 100,000 when the property rises 20% are sold at $ 120,000 and cover the $ 100,000 loan and has made a profit of $ 20,000 ie equivalent to 200% of the value of the real investment of $ 10,000
But does the bank will grant you the loan without insurance? of course not... ?The bank will ask you to start mortgage the property. Insurance in the event of the low price of the property also will be asked.
In this case, your capital of $ 10,000 would be the value of the insurance, which will keep him the bank has a deposit that the property value has fallen to the sale of the mortgaged property and the completion of the loan value of the remaining insurance reported to you.
At a time when the currency became too is treated just like dealing in real estate is, they become bought and sold and can make a profit by banks began granting facilities in the form of loans against a pledge of purchased currency has in addition to the insurance and began our shows the principle of margin or what he knows mostly Balmarzin ( margin) It is insurance that keep it at the bank against the loan that you get a particular currency to sell it and buy another currency keep the bank has (encumber) until you sell either a profit or loss in the event of profit Vsicom the bank to release your insurer that you cum plus value earned In case of loss the bank will deduct the loss from the insurance and the release of the remaining amount.
The work is done in this way systematically where the bank allows you to get a loan equivalent to specific multiples of the insurance value you put in other words, if you put a $ 10,000 insurance you can get a loan equivalent to 100 times the insurance which you can get a million dollars as a loan but will not be able to get In cash, but this loan will be conditional on other currency by buying the bank pledged to keep it that has to sell them to cover this loan and then you can get the difference or pay the difference.
In this case, the term would be that the bank may give you leverage of 100: 1 meaning that the bank will allow you to borrow an amount equal to 100 times the insurance that you have a filing.
Hence, we get to a simplified definition of a system of financial leverage, a system gives the investor the opportunity to invest a specific weakening of its capital.
Many of this system is a golden opportunity investor can maximize profits through it but the fact that the use of financial leverage is a double-edged sword and can be considered a disaster that was used in a manner not well thought out and invest exhibition failure, exposing the investor to risk the entire capital loss in this case.
You can understand the leverage in trade currencies through the following example:
• head of the owner $ 10,000. • Want to buy a standard contract worth ($ 100,000), while do not have this amount. • Financial your leverage (1: 100), ie, every dollar gives you the possibility to purchase $ 100.
• The broker book part of your balance ($ 1000 for example) to buy you a standard contract (so-called margin sevices). • remaining in your account ($ 9000) is called the margin available.
If the transaction is closed, for example, net profit ($ 2000), you will be able to get this full profit plus the value of the reserved margin ($ 1,000). Result: increases your account becomes $ 12,000
If, for example, the deal closed on a net loss of ($ 2000) Vsicom median book value of the losses from the margin available, given the reserved margin.Result: less Hspak becomes $ 8,000
This is the idea of the leverage system margin, you require execution of the contract, who shall mediator to book part of your account and buy you the contract, if you win take the value of profit plus margin reserved, and if lost takes the broker of your account covers the value of your losses, and relive the reserved margin again.
