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How Does Leverage Trading Work in South Africa?

Leverage Trading

Trading in the financial markets are growing swiftly ever since lockdown came into effect post-COVID-19 spread in South Africa. People found new ways of making money after losing their esteemed jobs. Folks of the country started with a little money they had left and earned huge returns in a short period. It happened due to the selection of the correct broker and the correct timing. Leverage trading has been the driving force behind it.

Through leverage trading, people can enter the market with a few funds in hand and ensure greater gains with the right strategies in place.

What is leverage trading?

In leverage trading, traders use a small amount of capital to get hold of bigger trading positions. Thus, leverage trading can work wonders for any person willing to enter the financial market but does not have sufficient money to spend, leverage trading can work wonders. However, there’s a prerequisite to experience. One should have enough knowledge and information to acknowledge how does it work and its proper functionalities.

Hence, in leverage trading, a buyer does not pay the full amount. Most traders prefer it in forex trading because the leverage ratio is higher there compared to other markets. Stock markets come a distant second in the choice. However, huge returns can be garnered by South African traders using it.

Professional traders use leverage across several financial markets, including indices, commodities, stocks, forex, derivatives like CFDs and ETFs. Therefore, leverage trading amplifies the methods of earning money.

Understand leverage trading with example

For example, a leverage of 1:20 would mean that a trader can hold a position worth USD 20,000 with USD 1000 in the account. So, traders with little spending capacity can get benefitted manifolds.

Hence, the concept of leverage seems sound and nice because it can immensely magnify the winnings. However, if the prediction goes wrong, it can also hand over heavy losses to investors. So, it works both ways. Therefore, it is recommended not to enter the market using leverage if you are unsure about the trends.

So, it does not matter how appealing leverage may seem. One should enter by ensuring a complete understanding of the market. It is essential because, similar to bigger profits, if things go different, it may land you in massive and unwanted losses if things go different. So, before investing using the method, a trader needs to be cautious.

Moreover, novice traders should be extra cautious while investing using the method because they are short in knowledge, and that can cause them extreme losses quickly. Also, new investors are excited about the trading world and its glittering success. But they do not look at the flip side that is even more dangerous and has the potential to wipe off all their profits in a single go. So, that awareness is pivotal.

How to start trading using leverage?

Every madness comes attached to a method and so does leverage trading. But more importantly, here, your capital is at stake and one wrong decision and weed out all your funds into oblivion. So, to avoid that, you need to study and research leverage and its impact on different markets. Hence, the advantage lies with people who come well prepared and know the significance and losses equally.

So, you can start leverage trading by picking up an instrument that offers the least leveraged trading. That is because that helps in gaining confidence. As a trader in South Africa, it is always better to start things slow. It aids in understanding the trades of financial markets, and you can learn from your mistakes by risking a little capital.

Also, a few gains can boost your confidence level, which can increase your wealth. This type of trading is beneficial for those who are trading short-term price movements. Thus, they can use it during scalping and congregate huge piles of profits in a short time when there is enough evidence of the trend’s direction.

Furthermore, it provides an opportunity for traders for keeping their trades open full time if they see any negative returns. So, they can exit the market at any given point, which is assuring.

However, traders looking to invest for the long-term cannot use it because then it would require them to take the delivery of the instrument, which is not the case in leverage.

Additionally, the buy and hold approach needs time for an asset to reach a level of your requirement, which is often time-consuming. However, that’s not the case while using leverage.

What are leveraged products?

Leveraged products are defined as derivative instruments or assets that require a lesser investment but are worth more in the financial market compared to the deposit made by an investor. For the biggest profit, astute traders use leverage on products like CFD. Here, you don’t need to own the underlying asset. You can sit back and speculate the market by applying leverage. If your prediction is correct, gains can skyrocket in a matter of minutes.

Thus, more and more investors are getting attracted to leveraged products like CFDs and ETFs. However, these are recommended to only those who have gained enough experience in the financial market.

Through leveraged products, you get a large exposure to the market without making a huge capital investment.

Hence, some of the best-leveraged products include:

  • Forex trades
  • Shares
  • Indices

Indices

An index represents the collective performance of a number of assets listed on an exchange, region or sector. So, if the aggregation is in profits, it will show the markets in green and if not, it will go the other way. You have the chance to use leverage for opening a position. Since, indices are not available physically. You can bid on them via products that mirror their movements, that is ETFs and CFDs.

Shares

A share represents the unit of a stock of a particular company. It is fit to open leveraged products on thousands of shares. It is recommended to use blue-chip shares for a profitable venture. However, you can use it for penny stocks also.

Forex

Foreign exchange is the biggest liquidity market globally. Also, it is the most traded one across the world. You can use leverage here to earn bigger profits in the least time. However, you need to be cautious before putting the bids due to the volatility.

How does leverage work?

For making the leverage work, one needs to make a deposit which is called a margin. It offers increased exposure to the underlying asset. Essentially, it means, a trader is putting down a fraction of funds in the market, and the rest is loaned by the broker or an exchange.

Let’s take an illustration to understand it better. For example, in traditional trading, if you want to buy 2000 shares of a stock trading at USD 10, you’ll have to spend USD 20000 for taking the delivery( it is sans any commission or fee). So, when it gains USD 2 and reaches USD 12 per share, there’s a profit of USD 4000 on them. If you close your position on it during the conventional trade, the gain belongs to you.

You made a profit of USD 4000 after investing USD 20000. That’s a massive gain.

However, it is also true that if the market had lost USD 2, you would have made a loss of USD 4000 at the same time. Thus, the potential loss is always there. But if you are a long term investor, such highs and lows do not matter until the price touches your expectations.

In that case, small profits and losses are immaterial for a trader. But in leverage trading, you spend a slight percentage of your total budget and make massive benefits. For example, if your broker is offering 1:10 leverage ratio, it means you can take a position on shares worth USD 20000 with USD 2000 in your account. And if the price of a share surges by USD 2, you earn a profit of USD 4000 upon exiting the position.

So, the profit is immense. However, vice-versa is also true. If it tumbles USD 2, the loss would be equally detrimental. But the moot point is, as a trader, the investment made by you was in fraction compared to the conventional or traditional trading.

Learn about leverage ratio

A leverage ratio exhibits the measurement or gauges total exposure of your trade compared to the requirement of the margin. The leverage ratio may vary and depend on the kind of market you are trading. Moreover, the size of your position, market trends and who you are trading with are also some of the factors that ensure your trade.

For example, in some cases, a margin of USD 500 will provide the same exposure of USD 50000. SO, that’s the difference it makes in a trader’s life. Benefits magnify, and so do the profits.

Advantages and disadvantages of leverage trading

Every coin has two sides, and so does leverage trading. The methodology poses numerous advantages to traders. Here are a few:

Advantages

1. 24-hours-trading

Depending on the market, you can use leverage trading 24/7 for earning profits. You can try it on cryptocurrencies, forex etc. that allow round the clock trading.

2. Massive profits

As a South African, you have an opportunity to magnify your income or returns using leverage trading. By investing little, you can expose yourself to a bigger market and make huge profits quickly.

3. Higher value assets

Through leverage trading, a broker gets the advantage of trading higher value assets that otherwise would be a tough bargain into the portfolio.

Disadvantages

Leverage trading may be a little disadvantageous for those who do not put up strategies while using it.

1. Magnified losses

If you cannot control your transactions and invest more than you should, leverage trading can account for humongous losses. That’s one of the biggest disadvantages that a trader may have to face.

2. More fees

If you use leverage trading on stocks, where leverage is often less, you might have to pay more fees compared to forex trading. Also, the charge is variable on every trading exchange or broker.

Conclusion

Leverage trading has pioneered innovative ways of investment. With its inception, investors and traders have started accumulating massive gains in quick succession. Brokers like PrimeFin are offering their services in South Africa, which is helping in exalting wealth.

Moreover, one needs to be well prepared and access some experience before starting trading in the financial market. Here are some of PrimeFin’s features:

  • Instant access to 10,000 markets
  • Trading speed is quick
  • Dedicated account manager
  • Zero commission
  • Free education hub
  • Top-class data safety
  • Cross-functional platforms

FAQs

Can leverage trading be considered a good idea?

Leverage trading is one of the best ways of earning great returns with little money hand. However, it is important to strategise every move to weed out risks while taking a position in the financial market. Also, a little study regarding an instrument can help market players a big-time while they trade in several volatile markets.

How to manage risk using leverage trading in South Africa?

Leverage trading is all about taking risks, but calculated one. So, if you decide to take a plunge into the financial market, strategise your move instead of looking at your peers. The cost of the contract can limit your losses while you are leverage trading in options. Moreover, the usage of good tools can indicate to you about the market. Thus, the right prediction can help you manage the risk.

Can we lose money using leverage trading?

There is a possibility of losing money while using leverage trading. So, it is recommended to get some experience before you try your hand in leveraging. That may help you to know the consequences of wrong trading ways in the financial market. Look at the indicators that are a harbinger of losses. Thus, losses can be avoided.

Is leverage trading good or bad?

Leverage trading in South Africa can be both good and bad depending on an individual’s understanding of the financial market. Also, someone who is satisfied with the profits earned after applying leverage can say it is good. And those who get driven away by greed end up losing money. For them, leverage trading is bad. PrimeFin broker can help you acknowledge that.

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