Certainly most people who are interested in finances have heard about the concept of investment lever (in other words, leverage or leverage) . It is thanks to her that we do not have much capital, we have a chance to make a lot of profits by investing in, for example, the FOREX market or the derivatives market. But on the other hand, through the leverage, our invested funds can also be quickly lost. Let’s check whether it is worth using the investment lever.
What Is The Investment (Financial) Leverage?
Let’s start with what the investment lever is and how it works. The easiest way to say is that it is a loan granted to us by a broker or by another entity that gives us the opportunity to use leverage. Thanks to this, having a small amount of capital, we can conclude transactions based on a much larger amount than we actually have. In Poland, the highest available level of leverage is 100: 1, but among brokers from other countries, we can find levers even at the level of 1000: 1.
Let’s assume, then, that we have 1000 zlotys to invest. When we use the 100: 1 leverage, we will be able to trade 100 times more capital, or 100,000 PLN. However, this involves a risk. For if our investment does not prove successful, the losses count not from PLN 1,000 but from PLN 100,000. So if the value in which we invested, will change by only 1% in the opposite direction than we assumed, we will lose the entire 1,000 PLN. If it changes more – we will be on debit. Of course, when we invest well, our profit will also be very large.
Can we somehow secure ourselves against a negative balance? It turns out that some brokers guarantee protection against negative balances. This means that when investing, we lose only money that we have deposited with our broker. If we do not choose this option, we can get into big trouble. According to specialists, the vast majority of investors investing with leverage loses their money or even needs to contribute to the investment. So when we do not have any protection against a negative balance, and our investment goes in the wrong direction, and so often happens, the broker will call us to top up the deposit, and when we do not have it, we will be left with a loan that will have to be given back.
Thanks to the investment lever, we can earn a lot of money. But on the other hand, we can also lose a lot of money. Therefore, before we start investing in this way, let’s think about whether we want to take such a big risk.