When you are trading stocks it can be difficult to manage more than one trade at a time. Using leverage is generally considered to add risk to a trade, but I think if used correctly the leverage can make your successful trades more successful, while keeping your risk limited, and keeping focus on your best trade available as opposed to juggling multiple trades.
When stock trading you mitigate risk by never risking more than 2% of your account on a given trade. By setting stop losses you can control your losses while allowing unlimited upside potential. For example, if a stock is $50 per share, but you put your stop loss at 50 cents per share with an account worth $50,000 you can risk $1000 on one trade. In order to lose $1000 you’d have to buy 2000 shares or $100,000. Essentially you borrow $50,000 and invest your $50,000. If your stop loss is hit you lose $1000, however if the stock goes up 5% you’ve gained $5000 or a 10% increase. The leverage doubled return, kept you full invested with only one trade, and still managed your risk.
Obviously if the trade went the other way and you forgot to put a stop loss on the trade you can face the dreaded margin call. A margin call is simply a broker selling your stocks to pay your loan back ensuring they receive their funds back. Usually this forces you to sell stocks at a low which goes against what you are taught when you first learn the stock market. You know, buy low sell high. A call on your account does the exact opposite.
If you are going to use leverage to increase returns you need to spend more time on research because you need your win percentage to be improved, you must always mitigate risk with stop losses, and you need to watch your borrowing fees so they don’t eat all of your returns.
