Have you seen someone change a flat tire? He could easily lift the car’s body by using a jack. When car tires had been lifted from the ground, the last thing only changing the flat tire, finish.
Imagine if someone had lifted the car without using a jack. We need a great amount of power to do so and in my opinion it’s very useless, he may even cannot lift the car. But by using the jack, he seems able to do it without spending significant effort and obviously very effective.
This leverage, it works like a tire jack. With minimal effort, we can do work to a maximum.
In trading, leverage’s function is to reduce the capital we should spend in making transactions. For example, if this is set to leverage 1:400, then to do a transaction valued at $ 10,000, we just need only for $ 25 . Capital amounting to $ 25 this is what came to be called the “margin”.
With availability of leverage, we are enabled to perform transactions with less capital and inexpensive than the real capital. Later, in subsequent chapters we’ll discuss about leverage comprehensively.