What are the risks associated with leveraged trading accounts?

Question

What is a leveraged account and why is it mandatory on some trading platforms to operate through leverage?

Also, what are the associated risks? Could I end up losing more money than I invested?

Answer 1

"Leverage" is when you borrow in order to invest.

Mind you, most people aren't going to just give you money to gamble on the stock market completely unsecured; rather, you deposit (say) $10,000 and buy a stock... and then you have $10k in assets which you can borrow against, so you can buy another $10,000 of that stock. Now if the stock goes up you'll make twice the gain (2x leverage). However, if it goes down, you'll lose twice as much as well.

If the value of your stock falls, your line of credit will be reduced as well; in this case, since you used all your credit and are now over your limit, your broker will issue a margin call (they will demand a deposit of additional funds, or they will sell some of your stock at their discretion). This protects you from owing more than you invested, but it's still sometimes possible (for instance, if a company spontaneously goes bankrupt and becomes worthless, and your stock becomes worthless).

There are also things like leveraged index funds and commodity funds which aim to return some multiple of the market's earnings. These are designed for intraday trading, though, and usually end up underperforming significantly over the long term.

[edit] Mose people who accept borrowed funds should generally accept real cash as well. However, if you're trying to short sell, i.e. borrow shares and sell them (in the hopes you can get them back cheaper later after the stock falls) you will need a margin line of credit to do so as well.

[edit 2] clarified margin calls