With leverage, you can open a large position by committing only a
small percentage of the total value of the trade. Some brokers offer leverage as high as 30:1. What does
leverage really mean? In simple words, it is like a loan that the broker offers you. Let’s say
you expect the EUR/USD currency pair to climb by 100 pips from 1.1898 to 1.1998. You have $1,000
but your CFD broker offers an account leverage of 10:1. This means you can gain exposure of
$10,000 for this trade despite only having an initial investment balance of $1,000. If the
market moves as you estimated and the pair does add 100 pips, your profit will be $100.
Without leverage, you would have had to invest
$10,000 to profit $100 from the above scenario. This translates to a return on investment of 1%.
However, since you used the 10:1 leverage offered by your broker, you could make a profit of
$100 by investing only $1,000. This equates to a return on investment of 10%!
In regions such as the UK and Australia, some CFD
brokers offer leverage of 30:1. If applied to the above scenario, one could invest $1,000 and
gain exposure to $500,000. Again, if the market moves as you estimated and the pair adds 100
pips, your profit will be $5,000 and your return on investment will be 500%. That’s a great
opportunity! However, it comes with elevated risks. Since your exposure is significantly higher
with leverage, any potential losses will also be magnified if the market moves against you. This
means you can lose much more than what you had committed. It is always a good idea to read any
product disclosure statement (PDS) prior to using such a trading system.