You’ve probably heard the mention of leverage several times by now, but what exactly is it? Leverage is basically a loan that brokers will give you to increase your trading capital. Some brokers allow you to borrow 50 times (or more) the money you have in your account to make a trade. With $100 in your account, you could then trade $5,000. This allows you to make much more money than you could with just your own money. Remember though, most reputable brokers will subject you to a credit check before allowing you to borrow money from them.
There are obvious dangers to borrowing money on leverage. If you borrow $4,900 to bring your account up to $5,000, you are responsible for repaying any money that your trades might lose. If your trade sinks down to zero, you would then have to repay all of the money you borrowed. This is an extreme example, but the risk should be apparent.
So when should you use leverage? Obviously you want to minimize your risk, so you will need a few strong indicators to even initiate a trade. You should start with a minimal amount borrowed and work your way up until you are quite confident and successful with your trades. You will not be profitable if you start borrowing money right away, and you may end up owing your broker quite a bit of money as well. Your envisioned large gains can just as easily turn into large losses. This is not how you want to begin your trading career.
