Learning with BBVA Trader: using leverage when trading stocks
The BBVA Trader platform makes various tools and specialized content available to those customers who want to learn about the world of trading in more detail. Using leverage to trade stocks is a type of transaction that is supported by the BBVA Trader platform, which also provides the relevant must-know information for anyone embarking on this approach to trading.
To understand how these kinds of trades work, it’s fundamental to begin with a definition of the concept “leverage”. Leverage is a trading mechanism investors can use to increase their exposure to the market by allowing them to pay less than the full amount of the investment. Consequently using leverage in a stock transaction, allows a trader to take on a greater position in a stock without having to pay the full purchase price. The trader uses credit provided by a broker so that he or she only has to pay a percentage of the value of the transaction.
Any investor who wants to use leverage when trading stocks should know the following terms:
- Buying power: the amount an investor has available – including leverage – to buy securities. It is therefore greater than his or her account balance.
- Coverage or risk ratio: a fundamental indicator that the investor should always keep in mind. It represents the ratio of the net account balance in relation to the leveraged amount, the money that will have to be paid out.
- Margin calls: if the coverage or risk ratio falls below the minimum requirement to maintain the leveraged position, BBVA Trader will issue what is known as a “margin call,” a warning to the investor that his or her excessive exposure represents a risk that exceeds levels permitted by the bank.
- Closing positions: this occurs once BBVA has sent the corresponding warnings about exposure levels – the margin calls – and starts to cancel all the client’s pending orders, orders placed in the market but not yet executed. If the leveraged amount has still not been covered 100 percent after canceling these orders, the investor’s stock positions in the portfolio will be automatically closed in a certain sequence. To schedule the closing of these positions, the system uses an approach called LIFO (last in, first out). Starting with the most recently purchased, stocks are sold until the coverage ratio has reached an acceptable level. It is important to understand that this automatic closing of positions by BBVA should not be deemed to be a stop-loss order or market-with-protection order for the investor. The investor himself must manage his or her market risks, closing positions before the coverage ratio reaches the minimum required level.
Inside BBVA Trader
There is a leveraged trading service available to BBVA Trader users, which allows them to place orders on specific financial instruments without having to charge or ring-fence funds in their account equivalent to 100 percent of the investment’s value.
Using leverage for stock transactions carries risks, as it can cause very high losses and constant pay-outs by the investor. Therefore, this service is only recommended for investors who are accustomed to high risk, speculative day-trading. It is also recommended not to use too much leverage when trading and not to use all of one’s capital to secure a leveraged position. When investors use this kind of trading mechanism, it is crucial that they track the market, measure and manage risks, and finally, diversify their transactions.
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