The Concept of Leverage and Its Sizes

However! This may apply to other markets, such as stocks, real estate, and other investments.

In the forex market, the situation is entirely different. Brokerage firms provide what is known as leverage or margin trading, a facility offered to clients to enable them to trade with contract sizes exceeding their purchasing power.

Let’s assume: You want to buy a piece of land worth 300,000 SAR and approach a bank for financing. The bank may require a 10% down payment (30,000 SAR), financing the remaining amount to complete the purchase.

This means the bank financed the deal with leverage of 10:1—where 30,000 SAR represents one-tenth of the land’s total value. After a few years, if real estate prices rise and you sell the land for 400,000 SAR, you’ve made a 100,000 SAR profit from an initial investment of just 30,000 SAR.

The same principle applies to forex trading. Brokerage firms offer leverage to their clients—but at much higher ratios. Typically, brokers provide leverage of up to 100:1.

Stay tuned for our next lesson to learn more about the forex market!