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Leverage is literally debt. It is the same principle of a credit card. Your bank allows you to withdraw x-times more money than you own. Same way if you have a leveraged account of 50:1 it means that for every one dollar you have in your account, you can use 50 dollars. For example if you have a forex account and you buy one standard lot of eur/usd of $250, you really bought 50 times $250 is $12,500 worth of Euro's.
But beware of leverage. There is a reason for the term leverage is a two edged sword. While you can make more money by using leverage in a winning trade, you can lose more money also in a losing trade. Mykee's explanation is a good explanation of leverage. Read it a few times. Perhaps you could write the equation in an excel sheet a few times until it sinks.
Think of a hedge as a guarantee, an insurance. In the case of the farmer I gave earlier, the price at which he sells the futures is a guaranteed price. Come harvest, that is the price at which he can sell even if the price of corn is trading lower. A stock option == an option to buy or sell the underlying stock at the price the option lists when you bought it. It's a guarantee that you can buy or sell the stock at that price.
Can you help answer these questions from other members on NexusFi?
Ah, so that's why they call it an option! So, the farmer can sell higher than thecontract price, too, if the market allows?
In effect, it's a floor.
So...a derivative futures contract is valuable, given it is a price guarantee. Valuable to whom, though, outside the farmer? I get how he needs it, but as to the speculator, how does it work? If the market pric goes up, who'll want it, and if the price goes down, who'll want it? Forgive my stupidity, but I'm trudging towards conceptual knowledge.
Huh. As a speculator, I have a futures contract, and the market suddenly rises above its price, and other speculators think it will rise some more, my contract gains market value because it allows access to a commodity at a cheaper-than-market value. Correct?
Okay...that's going long, anticipating the market going up. Do I understand? Going short...seems more comlicated, though the concept is simple enough. You anticipate the market's going to drop, and you make plans betting on that outcome. How, though? It's taking advantage of price movement, only of a negative nature, but that, I don't quite get.
(Incidentally, now have a demo account of Ninjatrader 7 Any good tutorials of how to use it?)
The farmer cannot sell at any other price than the price at which he sold the contracts.
For the speculator, it means that if he bought contracts and the price went up 2 points, he can sell them again and take a profit. All the speculator does is buy or sell in a direction that he thinks price might go and when it does he makes money. This is what day traders do the whole time. They figure out a price at which they wish to buy and a price at which they wish to sell. A speculator can be compared a store owner who buys and sells inventory. He buys at wholesale prices and sells with a premium. His intention is never to keep the inventory for private use, but to resell it to make a profit.
Going long = Buy low, sell high (if you were right)
Going short = Sell high, buy low
Remember that when you short you borrow contracts from your broker. Google what does short selling mean and read every blog that comes up. Someone in the haystack will definitely give you the most enlightening answer.
I don't understand what you mean by negative nature, but if I anticipate that the price of the e mini s&p is going to drop 6 points and I was right and I took the trade, I know that my balance increases quite positively.
