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Trade shares with leverage: What is a leveraged share?
However, there are differences when trading shares. While investing in a company as a company share is considered relatively safe, a share can also turn into a speculative instrument when leverage is applied. Investors use leverage on shares to try to make money quickly on a small amount of capital, increasing returns exponentially. I will tell you below how trading shares with leverage works and what the differences are.
Definition: Differentiation between types of shares and the leverage effect
In order to understand how leverage in shares is created, it is first necessary to clarify the different forms of share trading. Classic share trading consists of buying and selling company shares. Both accumulating and distributing models are available for share trading. In addition, however, there are a number of other trading options that work for the asset class of shares. It is possible, for example, not to acquire company shares, but to buy or sell a security in a terminated manner. Options offer such a trading opportunity. You can also make profits by trading shares as options. This form of trading can also be leveraged due to its derivative character.
Finally, there are shares that can be traded as CFDs. High profits, but also high losses can be achieved with this form of trading. If you dare to take the high risk, the higher the return, thanks to the leverage of the Contract For Differences. Share trading as CFDs is characterised by the speculation of investors on the falling or rising of prices. The price of the underlying asset is always used as a reference.
So we can say that share trading works in three ways:
- Trading in company shares
- Trading as derivative financial products in the form of options
- Trading shares as CFDs
Both options trading and CFD trading can be leveraged. Leverage makes it possible for investors to achieve high profits with a low capital investment.
Leverage: What does it actually mean?
Leverage products are characterised by the fact that the capital invested can be significantly increased. For this reason, speculative stock trading is very popular, especially among risk-averse people. The basis for the leverage is always the underlying or the underlying value. The ratio between the underlying and the current price indicates the amount of leverage.
The higher the leverage, the higher the profit or loss when trading shares with leverage. Investors in forex broker exness must always bear in mind that leverage works in both directions. Consequently, both high profits and total losses can be generated. Compared to other trading strategies on the stock exchange, trading leveraged products is a very speculative trading approach.
For whom are shares with leverage suitable?
Due to the high risk associated with leverage, investing in a share with leverage is not a suitable trading strategy for everyone. This is clearly shown by the risk classification. The risks involved in trading are so high that there is a risk classification of level 7 for this form of trading. This means that investors must also have strong nerves when trading the capital invested. After all, both high profits and losses can be made in trading. In the worst case, investors suffer a total loss. In this case, you lose 100 per cent of the capital invested. Private investors in particular can usually not afford such a risk and therefore prefer to buy shares that have no leverage.
As an investor, you must therefore bear in mind that the price of leverage products can change at any time. The high volatility in the market ultimately leads to the fact that exponentially increasing returns can also be expected. Compared to classic share trading, the capital is invested at a significantly higher risk when buying shares with leverage.
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