Leverage is a strategy in which an investor uses debt (borrows money) to invest in certain financial products to increase the potential return of an investment. It enables the trader to use this temporary loan to open a trade of a larger size with a smaller amount of invested capital.
Leverage is presented in the form of a multiplier that shows how much more than the invested amount a position is worth. The multiplier shows how much debt (borrowed capital) you will apply to your initial investment.
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.
When opening a trade, you can decide if you wish to use leverage or not. Different instruments have different maximum leverage amounts, in accordance with applicable law, but eToro may choose to decrease the leverage on offer at any time.
The following maximum leverage amounts are defined by the European Securities and Markets Authority (ESMA) and the Australian Securities and Investments Commission (ASIC), and apply to all retail clients at eToro:
- x30 for major currency pairs (such as EUR/USD)
- x20 for non-major currency pairs (such as EUR/NZD), Gold and major indices
- x10 for commodities other than Gold and non-major equity indices
- x5 for CFD stocks (securities) and ETFs
- x2 for CFD cryptocurrencies (NOTE: due to the current high volatility in crypto markets, and the risk it presents, eToro has disabled the ability to open leveraged crypto positions.)
Please note that the use of leverage carries with it a higher degree of risk because leverage increases the magnitude of both gains and losses. If you use leverage on a trade and the market moves against you, your loss per pip will be greater than if leverage had not been applied.
Any retail client who meets certain criteria may opt to apply to become an Elective Professional / Wholesale Client in order to be outside these limitations. Please check out our dedicated Professional Trader page.
It is important to be aware that clients with Elective Professional or Wholesale Client status are not entitled to all protections that retail clients have under Australian Law, ASIC, CySEC or FCA regulations.
For more information about Leverage, please click here.