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July 11, 2008, Newsletter Issue #62: Leverage In The Foreign Exchange Market
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Tip of the Week
Leverage is used by investors and firms to finance assets rather than raising capital to increase value. Leverage in the foreign exchange market allows profits to be gained from the variable fluctuations in currency pairs. Few markets, even the stock market, allow for the high leverage that is available in the forex market. Traditionally speaking, leverage is based on what assets a firm or individual currently controls and the potential of future value. So, in the stock market, a person owning more stock has more leverage and capital funding possibilities than a person with few stock options. Forex leverage works quite differently. Leverage is really provided by the major financial institutions that a broker, trader, dealer, or brokerage firm is working with/beneath. So, leverage is not really based on what value the individual or firm controls. Instead,you should know that forex leverage begins when an investor sets up an account with a broker. This is often referred to as a margin account, which can be as low as a $10 minimum investment or as high as a multi-million dollar minimum investment. Based on the broker or brokerage firm’s major financial institution backing, the amount of leverage can fluctuate. The amount of leverage is based on ratios, such as 50:1, 100:1 or 200:1.
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Thank you for your interest and good luck! Forex Club, New York
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