The point of "leverage?"

If I have a $50 micro account leveraged 100:1, I will be able to trade with $5000.

If I short $5000 at ￥100 per dollar and buy back at ￥80 per dollar, I will now have $6250 in the micro account.

But in terms of actual money made, I will only have $62.50 - the same as if I had just traded the un-"leveraged" $50!

According to this understanding of leverage, how is my profit "magnified?" It isn't.

I'm missing something obvious but I don't know what it is. Someone please help me understand.

Thanks.

You would actually earned 1250$ in this case.


Leverage is basically ability to borrow money from broker and trade with it. Your loan is secured by your account balance. If broker will decide that you do not have enough money to secure your loan, he will take his money back by closing your open positions(margin call). It happens when margin requirement of your open positions is twice as big as your account net value. In your example you borrow 5000$ from your broker, take the trade, give back 5000$ to your broker and take the rest (either profit or loss).


Anyway trading with high leverage is not very good idea. Not only profits are magnified but any losses too. It is easy to get margin call this way. Notice that in your example you would get margin call on 25$ loss.

There are some very good articles at the top of this forum which explain leverage in varying levels of complexity. Help yourself!