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I am looking at an example of a leveraged trade here:

The best way to understand leverage is through an example of how it affects your profit or loss potential. If you trade with no leverage at all and invest $1,000, for every 1% move in the market you can gain or lose $10, which equals 1% of $1,000.

In comparison, if you were to invest the same $1,000 and trade using x10 leverage, the dollar value of your position would be equal to $10,000.

1% of $10,000 equals $100, so for every 1% move in the market you can gain or lose $100.

As I understand the x10 was basically a loan given to you by the exchange. So if the price does go up 1% and you decide to cash out, how is the profit exactly $100 and not lesser? Don't you have to repay the loan?

2 Answers 2

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  1. A 1% gain on $1k is $10

  2. They lend you $9k. A 1% gain on $10k is $100. You repay the $9k loan and you have a return of 10%. Your gain will be less if there is a borrow fee for the loan.

Beware of trading at such high leverage because leverage is a double edged sword.

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    What kind of collateral do brokers require as terms for such leverage? Any liquid asset would defeat the purpose, because that would allow the trader to just use that asset to buy a larger position directly without jumping through the leverage hoop. I therefore assume illiquid collatorals must be commonplace, but it seems to me that could still expose the broker to over-leveraged collatoral if the trader goes shopping among multiple brokers...
    – Will
    Commented Feb 16, 2021 at 4:30
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    @Will - I would assume that the collateral is cash though it could possibly be marginable securities as well. I have heard of some U.S. prop shops where the requirement is 20% and they watch margin like a hawk and will shut you down after you lose 'X' percent but before you blow out the entire 20%. Requiring as little as 3-1/3 pct (see OP's link) is definitely over leveraged broker exposure and seems insane to me. It must work because they've been around for some time. Commented Feb 16, 2021 at 4:42
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    Hah, yeah, I suppose it becomes more workable when the broker has a very fast shutdown/panic button.
    – Will
    Commented Feb 16, 2021 at 4:49
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If the price goes up 1% and you cash out, you get $10100. You repay the $9000 loan and you now have $1100, you started with $1000 so your profit is $100.

You may or may not be charged interest.

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