If leverage meaning is to be stated most easily, it is a lever used to lift the gaining amount. Now, levering the return means investing money into the trade to increase the stakes from its original form. This can lead to a good or a bad outcome, both in high extremes. Here are the notable benefits and disadvantages of its uses:
The benefits of leverage
- The borrowing trader can afford much more assets than that of his real investment.
- The trader can start with a relatively small principal capital and borrow the rest needed.
- If the trade performs well, once will have a huge return from the whole procedure.
The drawbacks of leverage
- If the market falls, the financial losses will increase according to the leverage.
- Its devastation can knock a company out of business.
- The price can rise or fall due to outer influence leading to amplified loss.
The first time investors should stay away from using leverage. It can be a blessing or a curse with no certainty. It is not recommended for a new trader to choose risk with a higher probability of loss.