How we used to trade without leverage.
At the moment, it is simply not realistic to imagine trading on Forex or the stock exchange without using leverage.
After all, it expands earning opportunities tens and sometimes hundreds of times, allowing you to earn money even with limited capital.
But this was not always the case. Leverage, in our usual understanding, appeared only after it became possible to quickly control exchange rates.
Before this, traders used a cunning scheme with collateral to increase capital.
Allowing you to get much less money than now. What does the scheme of working with leverage look like at the moment?
The trader has a certain amount, which acts as collateral when receiving money from the broker.
And the trading terminal automatically closes the position as soon as the price approaches stop out.
Therefore, brokers are not particularly limited in the amounts provided through leverage, because their money is reliably protected, and the spread commission increases in proportion to the size of the leverage used.
It turns out that money can be used many times.
Previously, banks did not have the ability to quickly control the price on the stock exchange, much less forcibly close traders’ transactions.
Therefore, everything was much more complicated; the trader, having $1,000 in hand, bought shares for this amount and went to the bank for a loan.
The bank gave a loan for these shares about 70% of their exchange value of the securities, the trader again bought the shares, but for $700.
Now he had $1,700 worth of shares at his disposal. If he wanted, he could go back to the bank and take out a loan using the shares he had just purchased. Over some time, the price increased by 10%, that is, now the investor had shares worth $1,870, he made the decision to sell, pledging to provide securities after a certain time.
Then he returned the loan to the bank (in our example, $700) and received an amount of $1,170 or 17% of the initial amount, that is, borrowed funds made it possible to increase profits by 7%.
Minus remuneration to the bank. Unfavorable scenario.
Unfortunately, the price on the stock exchange does not always go where you want it; in this case, shares purchased for $1,000 may already cost $900 and the bank asks to increase the collateral amount.
Since the securities he has are not enough, the trader can bring in more shares or return some of the money.
A critical situation arose if a trader took money several times and could no longer provide the required collateral, this led to bankruptcy. Moreover, both the trader and, in some cases, the bank that issued the loan.
The emergence of leverage radically changed the situation; brokerage companies for their clients. At the beginning it was not a large lever 1:2 or 1:3, gradually the size grew to 1:2000.