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  3. What Is Leverage Trading?

What Is Leverage Trading?

Phemex, Trade Simple

To understand how these kinds of trades work, it is important to start with a definition of the concept of leverage. “Leverage is a trading mechanism investors can use to increase their exposure to the market by allowing them to pay less than the full amount of the investment”. By saying that, using leverage in a stock transaction, lets the trader take on a greater position in a stock without having to pay the full purchase price. The trader uses credit provided by a broker so that the person only has to pay a percentage of the value of the transaction.

Any investor who wants to use leverage when trading stocks should know the following terms:

Buying power

The amount an investor has available (including leverage) to buy securities is greater than his or her account balance.

Coverage

A fundamental indicator that the investor should always keep in mind. It represents the ratio of the net account balance in relation to the leveraged amount, the money that will have to be paid out.

Margin calls

If the coverage or risk ratio falls below the minimum requirement to maintain the leveraged position, BBVA Trader will issue a margin call, a warning to the investor that his or her excessive exposure represents a risk that exceeds levels permitted by the bank.

Closing positions

This occurs once BBVA has sent the corresponding warnings about exposure levels and starts to cancel all the client’s pending orders. Orders placed in the market but not executed yet. If the leveraged amount has still not been covered 100 percent after canceling these orders, the investor’s stock positions in the portfolio will be automatically closed in a certain sequence. To schedule the closing of these positions, the system uses an approach called LIFO (last in, first out). Starting with the most recently purchased, stocks are sold until the coverage ratio has reached an acceptable level. It is important to understand that this automatic closing of positions by BBVA should not be deemed to be a stop-loss order or market-with-protection order for the investor. The investor himself must manage his or her market risks. So, closing positions before the coverage ratio reaches the minimum required level.

If you are planning to trade with leverage, do not risk your money. It is worth working with a service platform like Phemex which allows doing leverage tradings

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Updated on January 23, 2020

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