How to safely start entering leveraged positions in stocks?

Question

I am new to trading and I want to learn how leverage works. I have been buying and selling underlying stocks with DeGiro for a year now [playing it safe and been lucky till now] and I would like to safely try leverage with some spare money.

I know that I can/should papertrade first, but I find that I learn faster and I create the need to study more intensely when I have real money on the line.

So, at first, I would like to have an account of let's say 100 euros and trade with leverage with these. It may be ridiculous amount for leveraged trading but I am comfortable losing it.

So, DeGiro offers an "Active" account that offers 50:1 leverage.

My question is, how to approach this and only end up losing these 100 euros and not owe/pay more?

I intent to only go long with leverage only in stocks, and I have read that "If you go long with leverage you never lose more than your initial position".

Of course I suppose stop-loss orders are a no-brainer safety net.

I may have these concepts messed up in my head so please bear with me.

Answer 1

Leveraging means you borrow some money and then invest that into stocks. A poor idea, usually. If the borrowed amount is small comparable to your annual income, you are young, you diversify well, and the future income potential is huge, it may make sense to just leverage your investments a little bit. Something like 1.5:1 with small enough sums might make sense. No way should you leverage 50:1.

If you really want to benefit from stock value changes with a multiplier, your best bet is to find derivatives that track the security with a high multiplier. You probably won't find any derivatives with 50:1 multiplier because there would be a high risk in the value of the derivative vanishing entirely due to a temporary downturn. Something like 3:1 might be possible to be found.

If you invest 100 EUR with 50:1 leverage, it means 5000 EUR loan. For most people, it's very small. If you are young, your annual income is high, you diversify well and trust your future income potential, you could of course borrow 5000 EUR for investing. Note you can in the worst case hold negative equity after a market downturn, but then again paying back 5000 EUR is easy.

I'm sorry to say you won't find a risk-limited way to invest 100 EUR with 50:1 leverage. The leverage is so high that you have to bear the entire risk yourself.

Or then you could trade only on paper, without any real money.

Of course I suppose stop-loss orders are a no-brainer safety net.

No it isn't.

Answer 2

I intend to only go long with leverage only in stocks, and I have read that "If you go long with leverage you never lose more than your initial position".

That is true for options but not for stocks. As an example, let's do this in dollars. Suppose you buy 500 shares of a $10 stock on 49:1 margin. You put up $100 and you borrow $4,900. If the stock drops 20 cents, your equity is wiped out (500 x $9.80). What happens if it drops more than 20 cents? Rut roh! You could owe a lot of money. Avoid high multiples of margin.

Trading on margin is a double edged sword. On 50% margin you can make 2x or lose 2x. I have done it but I suggest that you think more than twice about doing so until you are far past being new to trading. You absolutely should paper trade first. While it's not a equivalent substitute because it lacks the emotional risk, it helps with learning the mechanics of trading.