What is leverage financial? Leverage Calculation

Leverage financial is a phrase that is no longer strange to businesses. This is a great tool that helps investors increase their capital many times over in just a short time. If you know how to use this tool skillfully, it will help you earn huge profits. So what is leverage financial? What is the formula? Let‘s find out with Learn Forex Trading.

What is Leverage Financial?

What is leverage financial? In the simplest terms, it is a tool that helps you trade with an amount larger than the original amount. It can be simply understood that investors will use borrowed capital to invest. Instead of using your capital to earn higher profits. 

The calculation formula in the easiest way to visualize is Leverage = Debt/equity ratio. That is, if a business uses a higher level of leverage financial, the debt ratio will be larger.

Let us take an example of how to calculate this financial instrument. So you can better understand the profits it brings as well as the risks of leverage.

For example: If you have $100 but want to make a transaction of up to $500, you need to choose the leverage financial level of 1:5. At this point, the difference of $400 is the amount that the exchange will lend you.

See more: You will lose if you do not know about Trading

The effect of leverage financial in Forex trading

In the foreign exchange market, exchanges will provide traders with many different levels of leverage financial. Therefore, when participating in a transaction you can choose the appropriate level. To open trading positions many times larger than the capital in the account. 

To better understand what leverage financial is, let’s take a look at some of its effects on investors:

• With a small initial capital, you can open a larger position to earn more profits. So no matter what your starting point is, with this tool. The opportunity to optimize your profits is appearing right before your eyes.
• With clear leverage financial, you can allocate capital effectively. Divide your capital into many parts, then use leverage for each part of your capital, you can execute more orders. From there you can earn more profits. And it limits quite a bit of risk compared to putting all your capital in one place.

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Is Leverage financially risky?

Is using this financial tool risky? The answer is yes. The fact that it brings many benefits to investors is undeniable. However, along with the benefits, there are still risks. But if that happens, unfortunately, it can lead to your account being burned. Therefore, when trading, you need to understand the possible risks to choose the appropriate leverage financial level.

In case of a loss, you will run out of capital after just a few orders. The higher the level used, the greater the loss. If you are not an experienced and mentally strong trader, be very cautious. Using too high a level will affect your psychology. And it’s easy to make misleading choices during the transaction process. So do you know what the risks in this tool are?

Tell you what the formula for calculating leverage financial is

Below is the formula to calculate leverage financial. To know how to calculate, please remember this formula.

With:

• DFL: is the magnitude of leverage financial.
• EBIT: is profit before taxes and interest.
• EPS: is the return on equity.

To calculate what leverage is after adding interest payments (I). We will get the new formula as follows:

In there:

• F: is a fixed cost.
• v: is the variable cost per unit of product.
• p: is the selling price.
• Q: is the product quantity?
• I: is the loan interest payable?

What is the meaning of leverage financial?

In physics, levers help us lift heavy objects easily. In finance, it allows investors to buy more than normal payments. In addition, it also plays some other major roles such as:

• Helps businesses mobilize larger capital for investment, especially new or small-scale businesses.
• When favorable conditions arise, it helps businesses earn many times more profits.
• Businesses can receive more tax incentives. This portion of interest expenses is tax deductible, helping to reduce the net cost for the borrower.
• It also shows that losses are disproportionate. Borrowers can rely on this to balance the amount of money they need. If there is a loss, it will not affect the business much.

See more: Instructions for registering an XTB account

Markets that can trade leverage financial

Once you understand the meaning of leverage financial, you should learn more about its trading markets. Specifically, it is not only used by businesses. Currently, in the field of online investment, it is also used frequently. Typically 5 markets can be traded with this tool such as:

1. Securities: Investors can borrow money from securities companies to buy stocks. Thanks to the leverage financial of the number of shares, investors can buy more than their capital. This is an opportunity to make high profits when registering to invest. 
2. Forex: This tool helps investors’ accounts grow incredibly. Opened transactions can increase up to 1000 times the capital. If the market is moving in the right direction, the profits for investors are not small.
3. Cryptocurrency: Like Forex, this tool can help investors amplify their existing capital. From there, high profits can be achieved if the cryptocurrency increases in price.
4. Futures contracts: Using it will help investors receive huge profits. But only need to spend a small amount of capital for these contracts.
5. Commodities: You can trade different types of commodities at the same time such as gold, silver, oil, cotton… without having to hold them. With support from Leverage Financial, you can increase profits many times over once prices increase.

   

Some notes to remember when using leverage financial

Surely you already know how profitable it is. Although the profit source is not small, there is a huge risk if you do not know how to calculate. Below are some notes when using this tool:

• Leverage financial exaggerates both profits and losses. The greater the profit, the greater the risk. That’s why if you use it and unfortunately invest at a loss, your business will lose more.
• If there is no clear direction or if it is misdirected, trading becomes very difficult. This leads to capital stagnation.
• Be careful with its interest rate because it directly affects profits. The higher the interest rate, the lower the profit, and at the same time, if there is a loss, the debt level is extremely high.

In addition, you can also learn more about Breakout and PIP to make the trading process more convenient.

Epilogue

Above is all the detailed content answering the question of what leverage financial is and the exact calculation formula along with some related information. Hopefully, with what Learn Forex Trading provides, you can better understand profit and risk. From there, figure out how to calculate and apply to bring in the most profit possible.