Leverage and the Forex Market

There was a time when the foreign exchange market was an investment venture exclusive only to those who can put up humongous amounts of capital such as banks and corporations. Back then, individual traders can only drool in envy at the hefty profits pocketed by such financial institutions as the forex then has no room for those who can not raise capital as large as those of the big-time players.

Fortunately, everything changes including the foreign exchange market. With the arrival of the Internet came the 'democratization' of the forex as the Internet has made currency exchange , more accessible to ordinary traders through online and trading and more importantly, the forex tool that is the leverage.

Leverage is present in most financial markets such as the stock market but nowhere has it brought more impact than in the foreign exchange market.

The creation of the leverage plays an important role in the burgeoning number of traders investing in the forex as it has made the currency exchange very much more penetrable than it has been in the past. It has also enabled small-time individual traders go toe to toe with the gigantic financial institutions, something that was very much possible in the past.

So how did the leverage did these all-encompassing changes in the foreign exchange market?

Leverage is basically borrowed money that is to be invested into something. It is used mainly to incur greater profits since greater capital (which is can be acquired through the leverage) means greater potential profit. Apart from that, it is also a very useful tool for individual traders as it enables them to go neck to neck against bigger players in the forex arena as they can raise amounts of capital way bigger than their bank accounts can allow.

Combine these given advantages with the fact that leverage level allowed in the forex is one of the highest among all of the financial markets in existence and you get the main reason why traders, small and titanic alike, flock to the foreign exchange market to try their luck.

With the numerous advantages provided by it, the leverage is still not the perfect tool most would like to think it is. It would be best for most to think of it as a double-edged sword as it can incur considerable profit but at the same time it can also bring upon considerable losses especially for the unwitting.

Leverage has contributed a lot to the growth of the foreign exchange market which is not surprising as it really gives advantages to the traders who are willing to invest in the currency exchange business. It is up to the traders though, if they can utilize the leverage fully for their success or for their own descent into financial ruin.