Let us now see what happens if the price goes down to Rs. Let the lot size be This means the number of stocks that must be bought is or a multiple of The futures price is Rs. Let us remember that investment for the futures trade is Rs. Therefore, the return should be calculated keeping this as the base. Let us now assume that the price goes down to Rs. From the above examples, it is clear that leverage is a double-edged sword.
Many professional traders borrow money to invest or employ strategies that allow them to invest more cash than they have on hand.
This is called investing with leverage, or leverage trading. This lets them greatly increase their buying power and potential returns, as well as their risk. Learn how traders use leverage safely and how trading with leverage carries the same amount of risk as trading with cash. Leverage trading, in the most basic sense, is any type of trading that involves borrowing money or otherwise increasing the number of shares involved in a trade beyond the number of shares you could afford when paying in cash.
Here are the different ways you can use leverage to trade in stocks:. A simple example is trading on margin. Margin is money you borrow from your broker to buy a security, using other securities in your brokerage account as collateral. Some brokers may have higher requirements. If you purchased shares with just the cash you have, you could afford shares. This amplifies your potential gains and losses.
Remember: You have to pay back the money you borrow from your brokerage. Many brokers also charge interest on margin loans, increasing the cost of investing with leverage. Options are another method of trading with leverage. One options contract typically involves shares of the underlying security. Buying an options contract lets you gain control over shares for far less than the cost of buying shares of a company.
This means that small changes in the price of the underlying security may cause large changes in the value of the option. Imagine you think that XYZ is going to lose value instead of gain value.
Call options give the option holder the right, but not the obligation, to buy shares from the option seller at the set price. There are also ETFs that use leverage to try to affect how they perform compared to the market. ETFs typically track a particular index; leveraged ETFs aim to track the gains or losses of the index they are benchmarked to. There are also inverse ETFs that aim to deliver the opposite performance to the performance of the benchmark index. A 3x inverse ETF aims to triple the opposite performance of the underlying index.
One of the primary risks of leverage trading is the fact that it amplifies your potential losses, potentially to the point where you can lose more money than you have available. For example, if you use margin to double your purchasing power, you double all of your gains and losses. Another risk is that your brokerage could initiate a margin call.
This is only one of the concepts dealt with in the BBVA Trader platform which has an extensive list of tutorials including an explanation of investment strategies using warrants and technical analysis identifying patterns that point to a change in trend. It also offers manuals, courses on understanding, using tools such as BBVA Trader Pro and simple guides on other types of operations. BBVA also organizes events that familiarize those interested with the trading world in a simple and clear fashion.
Buying and selling stock: how the stock market works. Investment bank. BBVA Trader is an easy-to-manage and accessible market monitoring platform for users with a trader and heavy-trader profile. Its Trader Pro version goes one step further. In line with its principle of immediacy and ease of use, this version of the tool is more customizable and offers more possibilities for operating in the markets.
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