Financial leverage meaning gearing, uses borrowed funds to amplify returns on investment. Leverage can be used with stocks, bonds, and other securities by borrowing at lower interest rates than those available from investments. Investors often use leveraged positions to magnify the potential for profit or loss; however, this may also increase risk.
The most common use for financial leverage is trading on margin using CFDs (Contracts For Difference). CFDs are usually used when investing in shares, stocks, or any other asset class when traders want exposure to that market without owning the underlying security outright. So, for example, a trader might use this strategy if they wanted exposure to the FTSE 100 but only had £500 to invest.
CFDs are a contract between two parties: the buyer and the seller. The buyer pays a small percentage of the total trade value as margin (usually around 0.25%), which allows them to hold a position size that is many times greater than their initial investment.
In conclusion, although financial leverage can magnify profits and losses, it can also be a powerful tool for investors who understand the risks involved. Moreover, when used correctly, leveraged CFD positions can provide opportunities to profit from market movements that would otherwise be unavailable.