GAFM GLOBAL ACADEMY OF FINANCE AND MANAGEMENT  ®

Leveraged products, also known as leveraged investments or leveraged assets, are financial instruments that enable investors to control a more substantial position with a relatively small amount of capital. The leverage is typically achieved through borrowing, and it can amplify both gains and losses. The primary mechanisms at play in leveraged products are margin trading and leverage ratios.

1.  Margin Trading: Margin trading allows investors to borrow funds from a brokerage firm to purchase assets. Investors are required to deposit a portion of the asset's value, known as the margin, while the rest is borrowed. This allows investors to control a larger position than their initial capital would allow.

2.  Leverage Ratios: Leverage ratios indicate the degree of leverage employed in a transaction. For instance, a 2:1 leverage ratio means that for every $1 of invested capital, $1 is borrowed. Higher leverage ratios magnify potential returns but also increase the risk of significant losses.

Leveraged products are commonly used in various financial markets, such as forex, commodities, and equities. While they offer the potential for substantial profits, investors must be cautious, as the magnification of losses can deplete capital quickly.

II. Derivatives

Derivatives are financial contracts whose value is derived from the price of an underlying asset or index. They serve as risk management tools, enabling investors to hedge against price fluctuations, speculate on market movements, and gain exposure to asset classes without direct ownership.

1.  Futures and Forwards: These derivatives involve agreements to buy or sell an asset at a specified price and date in the future. Futures are standardized and traded on exchanges, while forwards are customized contracts between two parties.