Leveraged trading involves buying and selling shares using margin. Leveraged shares are commonly known as CFD shares that can be traded on stock brokers like eToro. Contract for Difference (CFD) involves the price differential between the underlying asset at the beginning and the ending of trades. Several advantages of trading assets like stocks are available with CFD trading, including the ability to leverage one’s capital. Traders have the option of buying leveraged stocks in order to diversify their portfolios. The shares with leverage are purchased online through a broker. Deposits must be made after opening an account with a broker. The trader can then decide on the leverage and buy as many share CFDs as they desire. Leveraged trading has a lot of benefits and drawbacks.
In order to avoid putting money at danger, there are numerous other factors to take into account when buying leveraged shares. There are risks and benefits associated with it. The decision of the buyer to purchase leveraged shares is influenced by numerous factors, including the stock’s
historical performance, the broker’s policies, and many others. Both desktop and mobile trading apps can be used to trade stocks when using leverage. There are also the trading and non-trading fees charged by the brokers too.
We will share the review of Reddit and Quora users about buying leveraged shares, which will serve as a guide to traders. The FAQ section will answer some common questions majorly asked by traders that are looking to trade share CFDs with leverage.
What Are Leveraged Stocks
Leverage stocks are the stocks that are traded with leverage. They are often traded as CFDs. CFD trading involves trading the value of an underlying asset instead of actually owning the asset. The trader and broker enter into a contract to exchange price differential between an underlying asset at the start and end of the trade. CFD is also known as “Contract for Difference”. Several advantages of trading assets like stocks are available with CFD trading, including the ability to leverage one’s capital.
Here, only a small amount of money initiates and maintains a position. The “margin” represents only a portion of the position’s entire size. Leveraged trading is commonly known as margin trading. There are two different forms of margin used in CFD trading. Opening a position requires a deposit margin, and if the trade is on the verge of suffering losses that the deposit margin and any additional cash in the trader’s account cannot sustain, a maintenance margin may be needed. If this occurs, the broker could issue a margin call and ask users to top off the cash in their account. The position can be closed, and any losses accrued can be realised if users don’t contribute enough money.
The UK, Germany, France, Spain, Italy, Australia, and many other regions allow CFD trading through eToro. Clients from the UK, EU, and Australia using eToro can use a 1:5 leverage to trade stocks. Whereas clients from other parts of the world are offered maximum leverage of 1:10 to trade stocks on eToro.
How do Leveraged Stocks work
Traders occasionally desire to have a specific level of market access with little equity. Utilising capital that is less than the position opened is referred to as leveraged trading. Leverage is used in multiples of the trader’s capital investment, such as 1:2, 1:5, or higher. Both buy (long) and sell (short) positions may use leverage. The entire size of the position, and not the initial investment, will be used to determine your gains and losses. In other words, if you put $100 into a position and use 1:3 leverage, the size of your position as a whole is $300; as a result, your loss or profit will be determined using the $300 figure.
Leverage, often known as “margin,” allows you to reduce the amount of capital you must invest in order to trade. The amount of margin needed to sustain your position changes depending on how much leverage you are using. If stop-loss comes, your margin will cover your loss. Leverage demands a lot of attention because it’s a good idea to keep an eye on your portfolio frequently. For example, if a trader buys a stock at $100, the trader will receive 50% returns if the price rises to $150. On the reverse hand, a trader might use leverage and purchase the company’s stock $100 on margin. In this case, the trader would pay $50 out of their own pocket and borrow the remaining $50 from the broker using a 1:2 leverage. If the stock price increases to $150, the return would be 100%. But if the stock price goes down to $50, the trader will lose the $50 initial investment.
How to Buy Leveraged Stocks.
Traders can buy leveraged stock by following the steps below.
- Select an Online CFD Stockbroker
- Create a Brokerage Account
- Select your most preferred Leverage
- Deposit Funds
- Buy your Favourite Leveraged Stocks
- Manage your Trading Positions
Pros and Cons of Buying Leveraged Stocks
- Access to more Funds to Increase Positions
- Access to Trading Variety of Stocks at Once
- Profit could Skyrocket
- Inability to Own the Stock
- Highly Risky due to Market Volatility
- You can Lose more than your Initial Deposit
Popular Exchanges to Buy Leveraged Stocks
A stock exchange is where stocks are traded and here are some of the popular stock exchanges to buy stocks with leverage in the world.
New York Stock Exchange
Founded in 1792, the NYSE is the biggest stock exchange in the world, giving big names and companies the chance to raise money and transform the world. Traders can buy stocks on the NYSE. It is located in New York, US.
This is by far the second largest stock exchange in the world. Situated in New York, it was founded in 1971 with a total listing of around 3,554 companies. NASDAQ further has three stock exchanges operating in the US, namely the Philadelphia Stock Exchange, and the Boston Stock Exchange, and other seven European stock exchanges.
London Stock Exchange
Founded in 1801, London Stock Exchange is located in London, United Kingdom. It is open 24 hours. Companies can enter the stock market through the London Stock Exchange to raise funds and boost their visibility. Due to the LSE’s several listing markets, businesses of all sizes can list there. It also provides many options for fundraising.
Frankfurt Stock Exchange
One of the biggest markets for trading stocks in the world is the Frankfurt Stock Exchange. It is the largest of Germany’s seven stock exchanges, with a turnover share of almost 90%. Modern electronic trading, settlement, and information technologies are supported by the Frankfurt Stock
Exchange. It can accommodate the cross-border business industry’s continuously expanding needs. Xetra, the Frankfurt Stock Exchange’s entirely electronic trading system, is among the top electronic trading platforms in the world in addition to the specialised trading there.
Beside the above-mentioned stock exchanges, there are several other exchanges too where traders can buy leveraged stocks. Some of them are Warsaw Stock Exchange, New Zealand Exchange, Italian Stock Exchange, American Stock Exchange, The Stock Exchange of Hong Kong, Australia Stock Exchange, SIX Swiss Exchange, Norwegian stock exchange, Swedish exchange, Dutch stock exchange and many more.
Factors to Consider When Buying Leveraged Stocks
There are many factors that investors need to consider before deciding when and from where to buy leveraged stocks. We have reviewed a few below for making your buying process of leverage stocks easier.
Commissions & Fees
Every broker has different commissions and fees for different instruments. In the case of leverage trading, it’s crucial to understand the related trading and non-trading fees. A 2-cent per unit commission will be charged for CFD bets on US-listed stocks and ETFs with a price of $3 or less based on the closing price made public on the eToro platform for the last trading day of the preceding week.
Stock Brokers Regulation
It is essential to choose a broker with a variety of regulations in order to protect yourself from abuse and fraud. There are a lot of regulatory authorities in the world, and they include the Financial Conduct Authority (FCA), the Australian Securities and Investments Commission (ASIC), the Cyprus Securities and Exchange Commission (CySEC), the Financial Services Authority of Seychelles (FSAS), and the Money Services Business (MSB). Ensure that the broker you want to trade leverage stocks with is well regulated by some of these bodies.
Every broker that offers leverage trading allows different leverages. The leverage helps the traders to magnify their returns/losses. At the same time, it is as risky as it could be. The leverage depends on the jurisdiction. The maximum leverage to trade stocks in the UK and Europe is 1:5.
In an effort to take advantage of stock market volatility, many investors have been urged to buy leveraged stocks. Online trading systems have benefited by allowing users to invest in the stock market directly, bypassing a financial advisor. With market-leading systems like MT4, MT5, and other proprietary platforms provided by online brokers, traders can buy leveraged stocks on the web and on mobile devices.
The stock performance is an indicator of the stock’s ability to perform in the market. Before choosing a stock for leveraged trading, traders need to evaluate the past performance of the stock. Although the stock performance does not guarantee profits.
Shareholding patterns are important for trading since they provide traders with information about the financial health of a company. The division of shares that haven’t been listed on the stock exchange is referred to as the shareholding pattern. Shareholding patterns reflect a company’s share ownership structure. It displays how various investors have purchased shares of the company.
The amount with which a stock’s price rises or falls over a specific time period is known as its volatility. When volatility rises, it links to encountering high risk too. This way, investors can predict future movement. Furthermore, to the market overall, individual stocks can also be regarded as volatile. More specifically, the amount by which an asset’s price deviates from its own average price can be used to determine volatility. The statistical metric that is frequently used to describe volatility is the standard deviation.
Trading Platforms to Buy Leveraged Stocks
Trading platforms are softwares provided by brokers, which enable traders to trade in the stock markets. This platform could be proprietary software owned by the broker or third party platforms like the MetaTrader. Brokers like eToro and Capital.com offer their own proprietary trading platform.
These platforms can be used on both desktop and mobile devices.
Desktop Trading Platforms
To conduct leverage stocks trading with ease, every trader needs access to a user-friendly and modern desktop trading platform. For instance, users truly favour eToro’s desktop trading interface due to its “user-friendly” design. Customers can swiftly and conveniently start a new position for CFD shares with the help of one-click trading. Trading professionals will find it easy to compare charts for numerous assets and/or time periods using the ProCharts feature of eToro’s proprietary platform.
The MT5 trading platform also has cutting-edge features with multi assets offered in multiple languages. It also offers trading robots and a wide range of technical indicators. It is the most widely used third-party trading platform in the world due to its user-friendly interface.
Traders can easily trade leveraged stocks on mobile devices. The simplicity of placing orders while keeping a close check on the portfolio in accordance with current market prices has been a major factor in trading with mobile applications. There is hardly a broker that does not offer a mobile app for trading stocks. The MT5 also offers a mobile app. Both mobile apps can be downloaded on android and iOS mobile phones.
To buy leveraged shares, traders can make use of the efficient mobile trading app. Through the mobile trading app, traders can access all of the broker’s financial instruments, including leveraged shares. Similarly, the MT5 mobile app also has all the features of the desktop trading platform. It supports two accounting systems. One is the netting and the other is the hedging. All types of orders can be easily executed on the MT5.
Fees and Commissions Incurred When Buying Leveraged Stocks
Fees and commissions are often charged by brokers when buying leveraged stocks. They can be categorised into two, trading and non-trading fees. We will take a look at each of them below.
The trading fees are the fees that a broker charges upon the execution of a transaction. This includes spread, commission and any other fees incurred at the time of buying and selling of leveraged shares.
The spread is the charge on a trade that equals the difference between the bid and ask price. The spread rates vary from instrument to instrument and are significantly influenced by market conditions. For example, eToro charges a minimum spread of 24 pips when trading on the NASDAQ 100 Index.
A kind of service charge by a broker for its services is known as a commission. Most brokers offer a zero commission policy on stocks (e.g. eToro). It means traders can buy and sell leveraged stocks CFDs without paying any commission.
The non-trading fees include the charges by a broker that are not directly connected to executing trading transactions, they include overnight fees, inactivity fees or currency conversion fees.
Relative to the amount of the trade, there is a minor fee for CFD positions that are open overnight. It effectively functions as an interest charge to defray the expense of the overnight use of leverage.
For keeping positions available over the weekend, traders pay weekend fees. A weekend fee is thus three times what an overnight fee is. Depending on the asset, weekend costs are billed either on Wednesday or Friday.
Some brokers charge a fee for processing every withdrawal a trader makes. The fee varies from broker to broker. For instance, there is a $5 fee for each withdrawal request that a trader makes on eToro.
Currency Conversion Fee
Any deposits or withdrawals traders make will be subject to a currency conversion fee if the broker accepts a different kind of currency. If the deposit or withdrawal is made in a currency other than those listed as supported, the payment provider will likely charge you for the conversion from that currency to the base currency or vice versa.
If the trading account with a broker stays without any activity for a long time, some brokers might charge an inactivity fee. For instance, eToro charges a $10 monthly fee on inactive trading accounts.
The Risks with Leverage Trading
The fact that leverage trading increases your potential losses to the level where you could lose more money than you started with is one of the main hazards associated with it. For instance, doubling your purchasing power via margin will result in doubling both your profits and losses. In other words, you will lose over 100% of the money you have available to invest if a stock you purchase drops more than 50 percent of its value. Another danger is that a margin call could be issued by your brokerage. Your broker may ask you to deposit more money if the value of your account falls below a predetermined level in relation to the amount you have borrowed. This could occur if you are on the wrong side of the market, which could make your broker concerned about your capacity to pay back your debt.
Overleveraging is also another issue traders face. This mostly occurs to traders who find it difficult to control their emotions when trading. They might open trades against their plans occasionally as a result of their joy over their victories. They run the danger of irreparably harming their account if they lack self-control or follow a tried-and-true technique.
When an investor’s balance, unrealized gain or loss, and required margin are all equal, a margin call happens. The investor/trader will be required to deposit more money by the broker to get their account balance up to the required minimum. CFDs are complicated financial instruments that
carry a chance of losing money quickly because of leverage. Almost 81% of retail investor profiles that trade CFDs with eToro lose money. Traders should think about their understanding of CFDs’ functioning as well as their ability to bear the substantial risk of financial loss.
What Reddit and Quora Say About Buying Leveraged Stocks
To know what different users have to say about buying leverage stocks, we decided to check the opinions of Reddit and Quora users. Here are some of them.
Reddit is a platform for holding discussions, rating the content and overall helping members with any problem they share on the platform. One of the Reddit users described the risks of leverage for longer time periods. He said that the risk-weighted return can be substantial provided leverage is combined with a relatively straightforward strategy for limiting drawdown. Those who solely emphasise volatility decay are disregarding the mind-boggling compounding returns of a bull market.
Quora is a platform where members get the answers to their questions related to any topic. A Quora member asked a question regarding leveraged ETF as a long-term investment. The answer to this was given by another user who stated that Leveraged ETFs should only be kept for one day as they are short-term solutions. He further said that the capital would gradually diminish due to daily
rebalancing and compounding, especially in a volatile environment. Their primary function is to replace margin.
With the intention to diversify their portfolios, traders can buy leveraged shares. They can be bought through an online broker. After creating an account with the broker, you can deposit your investment funds into your trading account. Then you can set the leverage and open share CFDs positions as much as you want. There are many pros as well as cons of buying leveraged shares.
Additionally, there are many factors to consider when thinking of how to buy leveraged stocks. The past performance of stock, the broker’s regulations and many other factors affect the decision of the buyer to buy leveraged shares. These shares can be traded on both desktop and mobile trading apps. Fees are attached to stock buying or trading, and they are the trading and non-trading fee.
Lastly, we looked into Reddit and Quora users’ reviews about buying leveraged stocks. Several commonly asked questions were answered in the FAQ section so that traders can get a broad view of leverage trading.
Q & A
Leverage is the process of obtaining a loan from a broker to buy more shares than you can buy on your own. This allows you to open more positions greater than what your initial deposit can.
Overleveraging refers to borrowing more money than you can not afford to repay. It occurs when a trade opens more positions than what their margin can take.
Some of the best leveraged stocks include ProShares UltraPro Short QQQ (SQQQ), ProShares Ultra S&P 500 (SSO), Direxion Daily Small Cap Bear 3X Shares (TZA) and Direxion Daily Semiconductor Bull 3x Shares (SOXL).
A corporation is considered to be highly leveraged if it has more debt that is typical for its sector. Leverage is not always a bad thing. For instance, Adani power and Tata Communications are highly leveraged companies.
A stock with a 3x leverage target tries to outperform the index or other standard it tracks by a factor of three.
Stocks of leveraged companies are not bad but there are many risks associated with it.
Leverage Trading is good to increase your profits but at the same time it involves great risks.
Yes, traders/investors have to pay back leverage despite the profit or loss on positions.
Leverage trading is not good for beginners as it has the highest chances of losing money. Beginners need to understand leverage trading completely to step into it.