If you’re trading with a major broker like eToro and thinking about increasing the size of your trades, you may want to consider exploring their leverage.
If used correctly, leverage can be a useful tool for you as a trader, but it really is a double-edged sword, as it can lose you just as much money as it can gain you, so using it without caution is a terrible idea. Through this short guide, we are going to let you know more about leverage, how it works, what eToro leverage is, when it can be risky, and when it can be profitable. Read our guide on closing your eToro account or read our in-depth review of eToro.
What is Leverage and How Does It Work?
The number of times more than the principal balance that one can invest is referred to as leverage. So if your available balance is $1,000 and you are trading with a leverage of 100:1, you'll have $100,000 to invest. So, that way, you have far more trade power. Even for EU-based traders with strict regulation, a $1,000 amount from you may give trading worth up to $30,000 across many major trading markets
The role of leverage is to make trading more accessible to all traders in the market. Because market fluctuations can be modest, you can use leverage to amplify them.
Don’t forget that trading on leverage is borrowing money from the broker. This allows you to invest in bigger amounts than before. However, you should think of it as a type of loan, with the caveat that it must be returned, thus the risk level rises in line with the leverage.
The availability of leverage differs by country due to a variety of reasons. The regulation in a given area has a significant impact on this. ESMA laws in the EU, for example, ban the provision of leverage more than 30:1.
If you want to learn more read this guide on how to sell on eToro.
eToro offers leverage levels from 2:1 up to 30:1. Retail clients can leverage stock trades by up to x5 and forex trades on major currency pairs by up to x30.
eToro Cryptocurrency leverage level is x2.
Any asset traded on leverage is basically traded as a CFD. However eToro stock trading allows for 1:1 trading in major stocks where traders can own the assets. You want the CFD value to fluctuate in your favor so that you can profit after deducting your finance and costs.
If you keep your positions overnight, you'll have to pay eToro overnight holding costs (this is not uncommon among online brokers in industry).
|30:1||Major currency pairs (like EUR/USD)|
|20:1||Non-major currency pairs (like EUR/NZD), Gold and major indices|
|10:1||Commodities that are not Gold and non-major equity indices|
|5:1||CFD stocks and ETFs|
Professional clients and clients of eToro Australia Capital Ltd (ASIC regulated) are subject to similar limitations:
|30:1||Major currency pairs|
|20:1||Minor currency pairs, Gold or a major stock market index|
|10:1||CFDs referencing a commodity (but not Gold) or a minor stock market index|
|5:1||other CFD stocks and ETFs|
The only available leverage for US-based forex is 1:1, since CFDs are not allowed in the United States and they can only trade cryptocurrencies.
eToro Leverage on Real Assets
Some assets, such as eToro stocks, are traded with 1:1 leverage, meaning that you trade them without any additional financing. When you trade this way, you'll benefit from things like no markups on asset prices and no need to worry about overnight costs. You'll also own the underlying assets since you are trading with your own money.
eToro shares and cryptocurrency are only two examples of non-leveraged assets . You can also use the eToroX crypto wallet service if you meet specific requirements.
The Bottom Line
All in all, using leverage is playing with fire, especially if it’s like the leverage eToro provides, which involves some pretty high risks, so if you are going to trade on eToro or if you are already doing so, leverage is something that you shouldn’t ignore through your eToro trading journey, since it can help you amass a great sum of money. But tread carefully because it can also lose you just as much money.