When it comes to Forex trading, brokers often extend the option of leverage to their traders in order to trade a larger amount of funds than would be available on their own.
The concept of leverage is used by both investors and companies. Leverage helps both the investor and the firm to invest or operate. And in the world of business, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value.
Forex traders use leverage to significantly increase the returns that can be provided on their investment. Forex brokers offer leverage to their clients so they can profit from the fluctuations in exchange rates between two different countries.
The leverage that is achievable in the Forex market is often very high. Leverage is a loan that is extended to a trader by the broker that is handling his or her Forex account. Before he investor can place a trade, he must first open up a margin account with a broker. The amount of leverage starts at 50:1, and can sometimes reach 500:1 depending on the broker and the size of the position the investor is trading. Since standard trading is done on 100,000 units of currency, the leverage on a trade of this size is usually 50:1 or 100:1. Leverage of 200:1 is usually used for positions of $50,000 or less.