To expand your financial markets knowledge, we prepared a full guide for you on one of the most popular trading forms: through leveraged products.
- What are leveraged products?
leveraged products are settlements between two parties, buyer, and seller, specifying that the former will pay the latter the difference between an asset's current value and its value when the trade is closed.
leveraged products are financial derivatives because they allow traders to capitalize on assets' price movements without owning the assets in question.
- How Leveraged Products work
To better understand how leveraged products trading functions, it's critical to know some essential terminology.
- The Spread
The spread is the difference between the two prices, Ask and Bid, of a financial instrument.
Spreads vary from instrument to instrument, and the information is usually public in every broker's offer so that each trader can access it.
You will encounter this term not only when you trade leveraged products, but in other scenarios as well. For more information, check out our Forex Trading: Essential Forex Trading Terms.
- Leverage & Margin
Leveraged products are financial instruments that allow traders to gain more significant market exposure. Using leverage, you can access a more substantial sum of money with a smaller investment, the rest being borrowed from your broker. Note that leveraged products can amplify losses as well as potential earnings for a trader.
Margin refers to the amount of capital required to open a trading position for leveraged products. When trading leveraged products, there are two distinct types of margin to look for:
- Initial margin – a deposit required to open the position.
- Maintenance margin – If your deposit margin is not enough to keep your positions open anymore, a margin call activates, requiring additional investment to hold the position open. If margin calls kick in, all your trades are closed out because you don't have any usable/free margin.
Trading on margin is used to amplify trading results as well. This can be both a good and potential harmful thing for you. If volatility kicks in, prices swing more, leading to increased risks. At the same time, margin lets you diversify your investment portfolio.
- Deal size, trade duration, commissions & additional costs
You can trade leveraged products in standardized contracts called lots. The size of an individual lot is dependent on its underlying asset. For example, people can trade gold on commodity exchanges in lots of 5,000 ounces, and its equivalent leveraged products lot also has a value of 5,000 troy ounces. For shares, indices, or other assets, lot sizes vary.
Generally, leveraged products don’t have a fixed expiry date. However, you can close a position if you place a trade in the opposite direction to the one that you opened. For instance, you can only close a sell trade on Apple if you place a buy order of the same amount.
leveraged products trading commissions and additional costs
The costs of trading leveraged products include a commission (rarely nowadays), a financing cost (in certain situations), and the spread we previously mentioned.
Leveraged product commissions are less often used than before. However, financing charges are more frequent. These additional costs may apply when you take a long approach. Keeping a position overnight is considered an investment (and the provider has lent the trader money to buy the asset). Brokers usually charge interest on each of the days they hold the position.
Since we got the terminology out of the way, it's time to learn more about the advantages & disadvantages of trading leveraged products.
- Three advantages of trading leveraged products
Increased Market Exposure via leverage
Due to leverage, traders gain bigger market exposure, potentially enlarging their returns. Leverage's value has fluctuated throughout the years. Nowadays it is limited to a maximum of 30:1 for regulated leveraged products brokers. However, accessing larger leverage levels can magnify losses as well.
Trade 2.100+ instruments from one place wherever you are.
Leveraged products brokers offer numerous products in the world’s biggest markets, with unrestricted 24/5 access. For example, here at CAPEX.com, you can trade more than 2.100 leveraged products on eight asset classes: Forex, stocks, commodities, crypto, indices, ETFs, bonds, and blends.
Using our CAPEX WebTrader platform, you can invest in your favorite financial instruments via leveraged products from your mobile device or desktop, making trading practical and time-efficient. Also, you benefit from free access to industry-leading third-party market resources, helping you make more informed trading decisions.
Trade both long and short
Specific markets enforce rules that forbid going short, meaning they ask you to borrow the instrument before selling short or you need to worry about more significant margin requirements for short positions. In the case of leveraged product instruments, you can go short without borrowing costs because they are derivative products, and you don’t own the underlying asset.
- Three disadvantages of trading leveraged products
Leverage can also be a curse, not only a blessing.
Leverage risks expose you to greater potential profits but also greater potential losses. While you can always use risk management market orders, they can't protect your positions when huge volatility spikes occur, and you have used high leverage.
You pay the spreads.
Whereas traditional markets charge considerable costs in fees, commissions, regulations, and higher capital requirements, you need to worry primarily about spreads when trading leveraged products. Having to pay the spreads reduces the value of your successful trades while increasing losses.
Weak Industry Regulation
leveraged products trading doesn't benefit from industry-wide regulation, and you need to be extra careful before choosing a broker and investigate it thoroughly.
As a regulated broker by ADGM, CAPEX.COM considers the safety of clients' funds as paramount and is always showing dedication to maintaining a secure trading environment.
3 Key Things to Remember
- Leveraged products are agreements between two parties, buyer, and seller, specifying that the seller will pay the buyer the difference between an asset's current value and its value when the trade is closed.
- You can trade leveraged products in lots, mimicking how their underlying assets are traded. Closing a position is easy: you place a trade in the opposite direction.
- Trading leveraged products allow you to gain increased market exposure (via leverage), and to trade both long on numerous markets, from one place, without owning the financial instruments. However, leverage can also magnify your losses.
Sources: thebalance.com, babypips.com, investopedia.com.
Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience or current financial situation.
Key Way Markets Ltd shall not accept any responsibility for any losses of traders due to the use and the content of the information presented herein. Past performance is not a reliable indicator of future results.