Forex stands for (Foreign Currency Exchange), a market through which people trade currencies and conduct exchange transactions. It has recently become one of the most popular tools on the internet for making money. The popularity of Forex has grown remarkably over the past decade due to the fact that it is fairly easy to learn this lucrative trade, where your initial investment can grow ten-fold. It is no wonder, then, that all over the world today, it is considered the most profitable business model.
A Forex dealer can buy and sell currencies, trade gold and precious metals, or foreign stocks. One of the main reasons behind the popularity of this investment model is that it does not require a huge initial capital investment to achieve the profits described above. This is due to what is known as financial leverage.
Financial leverage is a feature offered by banks and brokerage firms, allowing investors to maximize their initial capital value, typically giving them 16 times their original buying power. In some cases, the investor's buying power is increased 400 times.
In order to more clearly explain the benefits of leverage and how it can be used to gain high profits, we will discuss online gold trading. One ounce of gold is worth 1,200 US dollars today. This means that 10 ounces of gold sell for 12,000 US dollars. Now, the obvious question here is: how can a trader purchase 10 ounces of gold for only $500?
The answer is actually very simple! Some brokerage firms in the stock exchange market offer leverage that maximizes the trader's buying power by 400 times. All the trader has to do is deposit $500, and apply the leverage for the investment account to have a buying power of $200,000. This way, the trader can purchase 10 ounces of gold without a problem. Simply put, this is how financial leverage works.
It is well known that gold prices fluctuate by at least $10 every day. Accordingly, all the trader has to do is buy or sell 10 ounces of gold, valued at $500, per day. When gold prices rise or drop by $10, the trader will earn at least $100 per day. Over the course of a month, total profits can reach up to $2,500, taking into consideration that, on average, the stock exchange market is open for 25 business days per month.
For this reason, many people today, including top traders from around the world, seek online trading opportunities in order to maximize their profits.
More importantly, people are very attracted by online trading’s perk of being able to bypass dealing with banks. It is also known that banks do not offer leverage that can reach anywhere near 400 times the initial capital. Furthermore, banks require shareholders to pay at least $3,500 in subscription fees to open an exchange account, offering a maximum leverage of 10 times the investment amount.
By contrast, the guiding principle for brokerage firms is to attract the largest possible number of traders. Even if they invest very small amounts, they can eventually gain profits amounting to tens of millions of dollars per month.
But why do brokerage firms offer high financial leverage free of charge, especially without requiring a minimum subscription fee? The real reason behind offering these types of perks is that brokerage firms still turn a profit from the difference between the buying and selling rates of the financial assets. Their goal is for the client to place a higher number of trades in order to turn more profit. The average difference between the buying and selling rates of gold is $40 per ounce. Accordingly, brokerage firms make $400 when buying or selling 10 ounces of gold.
This is why brokerage firms encourage traders to place as many trades as they can, so they can turn more profit. At the same time, their goal is to bring in the largest possible number of traders. This is why these firms allow traders to start their investment with very small amounts and offers them a financial leverage.