Normally Forex operations are performed with leverage, ie a loan to finance the operation. The advantage is that the profits can be multiplied but the risk is also increased to the point that you can become insolvent. In the previous example, suppose you have those $ 114.94 to buy 100 euros, but you ask «borrowed» to buy 1,000 euros, spending $ 1149.40. If the dollar is appreciated 1 to 1, then you will have lost $ 149.40 dollars (not the 14.94 of the previous example).
Example of how leverage works.
You buy 1 million euros at the exchange rate of 1.14 dollars per euro, that is: you have obtained 1 million 140 thousand dollars from your stock exchange to buy that amount of euros. The day after your purchase the exchange rate is 1.5 dollars per euro, so now your currencies are worth 1.5 million dollars, that is, you obtained 360 thousand dollars in profits.
Now imagine that the operation was carried out with leverage: to buy that million euros you put 300 thousand dollars and the bank lent you 840 thousand with an interest of 10%. One year after your purchase the exchange rate is 1.5 euros per dollar, so the million euros now is 1.5 million dollars, of which you will have to pay the bank the 840 thousand dollars of capital plus interest.
This leaves in your account 576 thousand dollars, of which 300 thousand are your initial capital and 276 thousand in net profits, almost twice your initial capital. As you can see, when you use the leverage to trade in Forex the profits increase, but also the risk.
On the other hand, suppose that the dollar appreciated to 1 per euro. It means that the 1 million 140 thousand dollars that you used to buy the euros now are worth 1 million dollars, you lost 140 thousand dollars, if you did not use a credit. However with a leverage, of that million dollars that you now have, you must pay the bank 840 thousand dollars of the credit plus 84 thousand of interest, remaining in your account 76 thousand dollars, that is, you lost 224 thousand dollars.
Leverage or credit is usually expressed as 1: 5. It means that for every dollar, euro, weight. The institution that will finance you will put 5 dollars, pesos, euros, etc. This level of financing may be higher and provide better profits, but to the same extent the risk increases.
Recommendations to invest in Forex.
While it is very easy to enter this market, it is also easy to lose money, and the minimum amount to enter is 1,000 USD in most cases.
Remember that it is a very volatile market, so it is recommended only for those who have more experience and sufficient capital.
It is a market only for those who have a high risk tolerance, and are willing to lose part of their money.
As in other investment mechanisms, it is recommended to invest money that you do not need, that is: money to spare, once your needs and commitments have been met.
If you opt for the leverage find out about the credit conditions and determine your ability to pay in case of loss.
It is unlikely that an institution will lend you such an amount if you have 300 thousand dollars in your account, but this amount has been established as an example for this article. ↑
The mentioned interests are a representative example to demonstrate how leverage works, so in a real situation the figures will be different. ↑