What is leverage? Let us assume that you have lived and finally saved a pretty sum. To begin
with it made $1000. Take them carefully and run to the currency exchange office. Security officer, such a good
fellow, caringly closes the door behind you and…takes away your one thousand and put it in a separate safe.
Frightened? You had better listen till the end.
While you were reading the advertisement on the wall, he takes the security bag from another safe. And then looking more and more good-natured and friendly, and this you are sure not to expect at all, gives you this bag in which there are $100 000!!! And says: "Go to the cashier window and exchange". You come up and sell the dollars ($100 000) and get francs. In return the woman behind the window takes the dollars and resells them to the next visitor…Hardly had you stepped away from the window, when the security officer offers: "Exchange more". You have thought for an hour and again to the window - now you sell francs and buy dollars. But naturally due to the difference in rate of exchange between the purchase and sale price (the rate is unlikely to change within two hours) you lose something. Let it be $100.
Then the same procedure is repeated several times. You buy and sell on the spot. It is as plain as the nose on your face that the security officer (who is certainly fights for the bank's hand) will not allow you to make more than ten exchanges. So you will be allowed to the cherished window only till your one thousand (that was placed to the separate office) compensates losses. And as soon as the gross loss is equal to the sum of $1000 that is all - you have played long enough.The security officer with perfect calm will take back the bag in which there is only $99 000 left after all your unsuccessful exchanges. And will gladly show the door to you having added your $1000 from the safe to the bag. The bank will be satisfied. Everything is all right with the bank: just as it had $100 000 before you came, so it has the same left.
Glad? Glad. You have been given an opportunity to operate a large sum of money - $100 000! And you, you have… But it is not your fault. It is just so cruel example. It shows how and what you have lost but in any case you have not gone to debts to anyone! You, so to say, ran a risk only to the amount of your contribution. But if the exchange rate changed in the exchange office so dynamic (every minute, every second) as in Forex, then you would possibly gain $1000 instead of losing it. And the situation could develop, for example, like this: you have $1000, you get $100000 (leverage). You have bought and sold - gained $100, then again gained $100 and again $200, gained $100, then lost $200, then gained $ 100, lost $50, gained $200 and $500 - as result you gained $1050. And even when the security officer took back $100 000, you had $2050 including your $1000.
That is the leverage. It is leverage that makes your possibilities manifold increase, because the income of $100 000 resale is always larger than the sale of $1000. However the losses will not be at a stop too, but for this case we will tell you about the rules of capital management which can help minimize the losses.
To sum it up: as a whole the leverage is a good opportunity. It is more profitable to use it than not. In many times! But to tell the truth the risk is in so many times bigger. It is worth knowing what risk is and how to combat it. It is like taking part in Formula-1. If you step on the gas having no elementary driving skills - you are sure to get smashed up. But if you learn driving sensibly you will get inexpressible delighted and the feeling of freedom driving the most powerful and obedient race car. Someone will just be glad and satisfied, and someone will certainly become a Schumacher!