What is capital, leverage and balance in Trading?

✔️ Information reviewed and updated in April 2024 by Pedro Martínez González

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To guarantee the correct execution of your Trading strategies, it is necessary to know such basic concepts as what is capital or leverage. Unfortunately, many people, due to lack of time or ignorance, do not take into account the basic concepts and begin to operate, which can generate many losses.

❌Here we will tell you, explained in a simple way, what is capital, leverage and balance, three of the most basic and simple concepts that all aspiring to the world of Trading should consider. Thus, they will not be left with a confused face when they read these words in a Trading blog.

📌Know the balance

Before proceeding to the other concepts, we must know the basis of everything, the balance, which is necessary to carry out all kinds of operations. And is that the balance is the amount of money we have to carry out operations - trade.

In other words, the balance is the money you have in your account when you do not have open positions, although if you do open positions, this does not usually change until they close. That is, the balance will be the same until the position is defined, in profit or loss.

For example, suppose you deposit $ 1,000 to start trading, well, your balance will be $ 1,000. Now suppose that you do some operations and they close accumulating 200 dollars in losses, then your balance will be 800 dollars, since the initial account will have to subtract the losses.

On the other hand, if your positions close with profit and they add up to 300 dollars of profit, then your balance will increase to 1,300 dollars, 1,000 of the initial deposit plus 300 of the profits of your operations.

As with capital, for example, the balance is never fixed, it is always dynamic or changing.

📌Tips to take into account about your balance

• ❌You must prevent this from falling to a minimum where operations are no longer sustainable.
• ❌Keep an eye on your balance so that you can determine if your strategy is generating more losses than profits.
• ❌Invest in your balance, so that you have enough money to generate new operations.
• ❌You can do a balance sheet each month to know how your actions, investments and results have performed. Use accounting balance sheets as an example.
• ❌The balance will always be dynamic, you will have to add the gains or subtract losses from each operation.

📌What is Capital?

In addition to the balance, which is basically the amount of money available in your funds, we have equity or capital. Equity is a concept that many overlook, but which can influence your decision to open new operations or close the ones you already have.

According to trading experts, the balance is when we add or subtract money from our balance of operations that are active or in real time. Equity or capital is like a dynamic version of your balance sheet, it is like a chameleon that changes color depending on the circumstances.

✅ We will better explain it to you with a practical example: Suppose you have deposited $ 1,000 to your account and your balance is $ 1,000, so you decide to open some operations in real time. So these trades give you $ 100 profit and $ 50 loss.

Then your capital will be the 1,000 dollars (balance) + 100 dollars (profits) - 50 dollars (losses), this will result in 1,050 dollars of capital, which would be your initial 1,000 dollars plus the profits or losses left by the operations. This can vary, for example, if we invest the papers and you win 50, but you lose 100, you would have 950 of capital or equity.

One of the points that most cause equity or capital headaches is that it varies a lot. And is that while you have open operations, the capital will fluctuate according to the market practically in real time, if the market collapses and two minutes later it rises, you will see it in your capital.

Although yes, the real impacts such as the sum of profits or the subtraction of losses you will see once the operations close. That is why from one moment to another you can go from the ground to the sky in your capital, depending on the market variations.

📌What about leverage?

On the other hand, we have leverage in trading, a unique investment method which allows you to practically invest without having to put your money. That's right, leverage is an investment strategy in which you operate with money that is not yours, relatively, but the broker's.

Think of a bank loan, basically this is leverage. And the broker will grant you a temporary loan so that you can make investments with a much smaller amount of money than your balance.. This according to a proportion which varies according to the broker.

There are brokers that give us leverages of 1:30, 1: 2, 1:50 or vice versa, depending on the platform and the broker with which you operate. Suppose you decide to buy assets such as gold in leverage and the broker offers you a multiplier of 1 to 50, this means that for every euro you put in, you will receive 50 as leverage, a temporary loan, from the broker.

So you decide to leverage 2 dollars of your balance in gold, thanks to the proportion you will actually be leveraging 100 dollars. Take into account that there are certain limits that you must take into account, since leverage has restrictions and conditions to comply with.

📌Benefits of leverage

• ✅Leverage in trading allows you to start making investments without spending a lot of money.
• ✅It is ideal for accessing markets that require a high investment that is difficult to fulfill directly.
• ✅It allows you to obtain much higher profits, which justifies the risk that can involve trading with money from the broker.

📌Risks of leverage in trading

• Losses can multiply when trading with money from the broker.
• This temporary loan implies much greater responsibility, since you are practically using money that is not yours.
• Interest rates are variable so there is a high risk that you will have to pay very high commissions.
• A possibility of losing much more money than we really have.

About the Author: Pedro Martinez Gonzalez

I'll tell you a little about myself! I am a financial analyst and economist with a master's degree in finance.
About my studies: I studied at the University of Salamanca for a Degree in Economics and then did a Master's in Finance in Madrid.
Do you want more information? You can read more about me here in my biography.

You can read more about me here.