Leverage 1:500 - the limit of an honest broker?
Leverage - is precisely the instrument which transforms currency trading from an internal game of commercial and central banks into an activity available to the widest range of individuals. Thanks to an interest-free loan provided by a broker, traders' positions are brought to the necessary minimum and brought to the market, while the broker himself receives the right to charge spread and SWAP as payment for his services. Therefore, speculation about the benefits of leverage would seem to be superfluous.
It is known that margin trading is not only profitable, but also dangerous, and traders often lose their deposits precisely because they use too much credit. At the same time the credit provided, regardless of the result of transaction, is always returned brokerThe company, unlike its client, has nothing to lose. However, representatives of the brokerage business, for some reason, are in no hurry to fully use this tool and limit the maximum leverage size. How exactly can leverage harm not only the recipient, but also the provider? This will be discussed below.
Leverage on : a question of size
Recall how leverage works in the financial market. In order to satisfy the request trader to open a trading position, the broker adds to his funds the amount missing to the minimum size of the contract. The ratio of borrowed and own funds is called leverage. Thus, the higher is the leverage on the position, the higher is the total volume of deals can be opened, and the higher is the profit of the broker from clients' trading. Following this logic, a brokerage company should be directly interested in offering its clients the highest possible amount of leverage and motivate traders to borrow as much as possible for each trade.
However, most bona fide brokers offer a leverage of 1:100, 1:200 or, at most, 1:500, deliberately limiting their own profits. There are several reasons for this:
- The company cannot influence the activity of its clients or change the essence of margin trading. However, the broker strives to minimize the losses of traders to the available extent, not allowing to open transactions in the course of which price fluctuations can provoke Margin Call. After all, every lost deposit is a lost customer for the company.
- It's no secret that traders tend to blame their failures on the market on a "third party" or a broker, so a conscientious company, wishing to buy possible reputational losses, guards inexperienced beginners from making high-risk large volume deals.
- Using leverage, traders do not receive borrowed funds "in hand" and do not tend to perceive them as a real loan. Nevertheless, in order to take a position to the market, a broker must invest his own money. That's why the company, if it is not going to overlap the orders inside itself, has to calculate its financial strength reasonably and accept only those credit liabilities, which it is able to fulfill.
Thus, in the long run, providing traders with leverage up to 1:500 is more profitable for the brokerage business than attracting clients with loans at a ratio of 1:1000 or higher.
Of course, this does not mean that a company offering high leverage unambiguously plays against clients, but the maximum leverage can and should be one of the factors taken into account when determining the bona fides of a company.
Leverage size - an indicator of a bona fide broker
Before you decide to open a trading account with a company that offers leverage of 1:700 or more, make sure that
- This offer is not valid for the entire mass of clients, and works selectively: only for owners of certain types of accounts, when trading specified instruments, etc;
- the company has a large enough capital to ensure the introduction of a large number of client applications to the market, taking into account the high level of leverage;
- The broker warns clients about the dangers of margin trading and, especially, the risk that increases when trading with a high ratio of own funds to borrowed funds.
Thus, having considered leverage objectively, not only in terms of its usefulness for you personally, but also as a tool for the implementation of the brokerage business, you will be able to make more informed and, ultimately, more profitable decisions in the market both in opening a trading account and in carrying out each specific transaction.