Posted on April 9, 2009 - by Mandy Ong

Leverage is not a bad word

Photo by Robert Couse-Baker

The scientific defination of leverage is the use of a smaller energy force to move an object of a greater energy force. Since the age of cavemen, the use of leverage in the form of simple tools has made the lives of mankind much easier.

Yet, in the financial markets, leverage is associated with high risk and investors often shunned leveraged products. The recent volatility in the markets also had many investors pointing their fingers at leveraged traders cutting losses to meet margin calls.

Indeed it is true that leverage trading carries a certain level of risk. With the investor only putting up a percentage of the total contract value, he runs the risk of losing his entire investment and more. For example, to trade 1 lot of Emini S&P at price 800, the contract value is Usd40,000 (usd50 x800pts), but the investor only has to have Usd 5000 to initiate a position. If the contracts falls by 100pts, the contract value drops by 12.5%, but the investors loses 100% of the amount he invested. Read more…

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