Understanding leverage and its benefits in trading apps

Trading apps make financial markets accessible to everyone by offering convenience, speed, and real-time insights. With just a few clicks, you can monitor assets, execute trades, and manage portfolios hassle-free from anywhere. Put simply, these platforms give you full control over your investments and break down the barriers associated with traditional trading. 

One powerful tool that enhances this experience is leverage, which allows traders to amplify their positions and increase returns with minimal capital. Read more to explore leverage, its benefits, and how to use it wisely in trading apps.

What is leverage in trading? A brief overview

Leverage in trading means using borrowed funds to increase your trading position beyond what would be available from your cash balance alone.

Leverage is typically represented as a multiple like 5x or 10x, or sometimes as a ratio such as 5:1 or 10:1. The larger the multiple or ratio, the greater the leverage. For example, if your stockbroker provides 10x or 10:1 leverage, it means that for every rupee you invest, your buying power increases tenfold. This amplification can be applied across various assets, including forex (currency), commodities, and indices.

Leverage is also possible in certain types of mutual funds but is limited by strict regulations. For example, leveraged mutual funds operate utilising margins in brokerage accounts and allow you to amplify returns by borrowing funds within permissible limits.

How does leverage work via trading apps?

Let’s find out how leverage in a trading app online works with an example:

Let’s say you want to buy shares of a company priced at ₹100 each. Without leverage, if you invest ₹100, you can buy just one share. If the stock price rises to ₹150, your return is ₹50 or 50%.

Now, if the app offers 2:1 leverage, you can borrow an additional ₹100, giving you ₹200 to invest. This allows you to buy two shares. If the stock price rises to ₹150, your profit doubles to ₹100, resulting in a higher return on your initial ₹100 investment.

Leverage can create profits, but a lot depends on correct speculation. If the stock price falls to ₹50, your losses could exceed your initial investment due to the borrowed amount. Hence, it is wise to set stop-loss orders and follow a well-defined trading strategy when using leverage. 

Benefits of using leverage in trading

Besides features such as access to upcoming IPOs (Initial Public Offerings) and NFOs (New Fund Offers), dynamic reports, and expert-curated portfolios, a trading app also offers advantages like leveraging. Here are the main benefits of using leverage in trading:

1. Financial flexibility 

Leverage in most trading apps usually lets you trade with 4-5 times more than what you can afford to invest. For example, with ₹10,000, you can control positions worth ₹40,000-₹50,000. This minimises the requirement for substantial capital and makes it easier to execute high-value trades with a relatively small amount of money.

2. Higher profit potential

Since leverage multiplies your trading power, even small price movements can lead to significant profits. For example, a 1% increase in the price of an asset can result in a 4% gain on your invested margin if you are using 4x leverage.

3. Easy diversification across markets

Many trading apps offer leveraged trading for multiple asset classes, including forex, equities, commodities, and indices. This means that even with limited funds, you can participate in high-value trades across multiple markets, diversify your portfolio, and spread risk.  

4. Increased liquidity 

Trading apps make leveraged trading hassle-free with real-time execution and margin tracking. This means you can quickly enter or exit positions without delays, which is crucial in fast-moving financial markets.

Key takeaways

Leverage in trading offers the potential for higher returns with smaller investments. However, it’s equally important to use it wisely and manage risks effectively. After all, a good trader is not just one who maximises profits but also one who carefully minimises losses. Make sure to choose the best trading app that offers the tools, insights, and features necessary to make informed trading decisions.