Margin and Leverage
Concept of LeverageA very extended and poor definition of leverage is that it's a tool that will help traders earn money fast and easy. And indeed, one of the most important advantages of the Forex market is given by the effect of leverage! Without leverage, it would be very difficult to accumulate capital by trading the market, especially for small investors. But leverage can also be very harmful if not properly understood. This duality is what makes this concept difficult to grasp and explains partly why there are so many misconceptions about it.
Financial leverage, meaning a purchase on a margin, is the only way for small investors to participate in a market that was originally designed only for banks and financial institutions. Leverage is a necessary feature in the Forex market not only because of the magnitude of capital required to participate in it, but also because the major currencies fluctuate on average less than 2% per day.
Without leverage, the Forex would not attract capital from the retail sector. It is designed to allow a greater market share to investors in accordance with their investment capacity.
Leverage is therefore a form of credit or loan, which allows us to trade with money from the broker-dealer. Financial leverage is also defined as the use of foreign capital per unit of capital invested.
In fact, the mechanism of leverage is what enables the existence of broker-dealers. They also have accounts in different banks which serve them as liquidity providers, thus acting as lenders of first resort for the broker-dealer's margin transactions. This means that the bank allows the broker-dealer to trade with larger amounts of capital and the broker-dealer, in turn, transfers this benefit to the user. The capital deposited in the bank guarantees limited risk, as does your deposit with the broker-dealer.http://www.fxstreet.com/