Trading with Leverage in Singapore

Leverage trading, also known as margin trading or gearing, is a way for traders to borrow larger amounts of capital than they have on hand to deposit as collateral. By taking larger trading positions, the trader's ultimate objective is to magnify potential profits that more than cover borrowing costs.

Leverage trading is offered in various markets and at differing margin ratios. Believed to have originated in the stock market in the 20th century, it is now commonly adopted in markets that trade in forex, futures, and even cryptocurrencies. Often expressed as a ratio, stock markets typically offer 2:1 which means a deposit of $1,000 gives the investor purchasing power of up to $2,000. Offered ratios in futures markets can hit 15:1, and in forex markets, they can go to 100:1, whilst 500:1 is believed to be possible on some crypto exchanges.  

In the excitement of accessibility to leverage, investors often forget that the power of leverage is a double-edged sword whereby it is possible to amplify potential losses as well. Potentially the initial investment margin can be wiped out by a small move in the wrong direction and if the investor continues to top up margin calls, the final investment loss can be much more than the initial margin deposited. As such, trading with leverage is a high-risk strategy, and traders should carefully consider the downside risks and not just potential rewards before using leverage in their trading.

In Singapore, leverage trading is regulated by the Monetary Authority of Singapore (MAS). Specifically, margin requirements are set out for holders of capital markets services licensees via regulations under the Securities and Futures Act.

What are the Potential Benefits of Trading with Leverage

Several potential benefits of trading with leverage include:

1. Increased potential returns: One of the main benefits of trading with leverage is the ability to potentially generate larger returns on investment. Leveraging gives traders access to a larger amount of capital than they would be able to on their own, potentially making larger profits if the market moves in their favour. For example, if a trader has $1,000 in his account and he is trading with a leverage ratio of 10:1, he can trade with a total of $10,000 or 10 times his own capital with the potential of 10 times more profit.

2. Increased buying power: Trading with leverage means greater buying power, which translates into potentially taking larger positions in the market. Certain investments may require much more capital than what the investor can raise e.g., a large standard-sized forex contract of US$100,000. With a 100:1 ratio, the investor has only to stump out US$1,000 to execute the trade.

What are the Risks of Leveraged Trading

Some of the main risks of leveraged trading include:

1. Increased potential losses: One of the main risks of leveraged trading is the potential for increased losses as leverage amplifies not only potential gains but potential losses as well.

2. Margin calls: Another risk of leveraged trading is the potential for margin calls. When trading with leverage, traders are required to maintain a minimum level of margin in their accounts, which is a deposit that covers the potential for losses. If the market moves against the trader and their margin falls below the maintenance level, the broker will issue a margin call, which requires the trader to deposit additional funds or to reduce their position. If the trader is unable to meet the margin call, the broker has the legal right to liquidate their position without further notice, which can result in significant losses.

3. Volatility: Leveraged trading is also subject to amplified market volatility, which can adversely impact the value of a trader's position. If the market is volatile due to negative breaking news, the value of a trader's positions may fluctuate rapidly, potentially resulting in large losses if the trade is unable to top up any ensuing margin calls.

What are Leverage Fees?

When trading with leverage, traders may be subject to various fees that are different from the typical commissions and nominal exchange-charged regulatory fees. The most common fees charged for leverage trading are management fees and trading fees.

A management fee is an interest payment to the broker for funds borrowed by a trader who uses leverage. It is charged only when a position is held overnight. Management fees are pegged to market interest rates as brokers often fund leverage by borrowing from other financial institutions to whom they pay interest charges.

A trading fee is charged whenever a position is opened or closed, like the commissions charged on a stock trade. Leveraged forex trades distinguish the higher taker fee for a market order and a lower maker fee for a limit order. A maker fee can even be negative, meaning you get paid for adding liquidity to the order book.

Leverage fees are typically charged on a daily or monthly basis, and they may be deducted from the trader's account automatically. Overall, leverage fees are charges that are applied to a trader's account when they borrow funds from a broker.

Important Considerations

Leverage trading can be a useful tool for traders, but its power to amplify results cuts both ways. Accordingly, it is important for traders to carefully consider the risks and costs involved in leveraged trading, and to manage their risk diligently to avoid potential losses.

Margin Trading with moomoo

If you intend to trade using margin, moomoo will be an excellent platform for you to do so. Firstly, you will have to check whether the stock that you are interested in supports margin trading. To do this, click on the list of icons found on the top right-hand side corner of the 'Quotes' tab of your desired stock. Then, check for the icons Marginable and Shortable. These icons will mean that you will be able to buy and sell the stock using margin. You can then click on these icons to find out more details such as the interest rates on the borrowed capital that you will be using.

Images provided are not current and any securities are shown for illustrative purposes only.

After that, you will see that at the bottom left of your screen, there will be a 'Buy on Margin' field which will tell you how many stocks you can buy using margin. Then, you can place your order on the number of stocks that you wish to trade, and if the amount of money exceeds the amount of cash in your account, a margin reminder will pop up where you will have to confirm that you intend to proceed with using margin. Sign up and download the moomoo app today to get more information.

Images provided are not current and any securities are shown for illustrative purposes only.