Leverage means that you as a trader can move significantly more capital in the market with a leverage product than you actually invested when you bought the leverage product. Let’s assume, for example, that you buy 100 CFDs that refer to a DAX share.
The share listed in the DAX has the regular price of 100 EURO. If you were to buy the shares regularly, you would have to invest 10,000 Euros when buying 100 shares.
However, if you buy the CFDs of the share listed in the DAX, you only have to invest 5% of the sum yourself.
The rest is “lent” to you by the broker, so to speak. So you can buy 100 CFDS of the share and you only have to deposit 500 euros for it.
In addition, there is a security deposit to be made, the so-called margin. The amount of the margin varies. In our example, we assume 5%.
If the share price rises, the value of the position is 10,500 euros. You have thus made a profit of 500 euros.
Since your stake was only 500 euros, you have actually achieved a return of 100% with this transaction.
This is also applicable when the market conditions are not in your favor and thus you may lose 500 euros.
