Leveraged Products

Leveraged products are financial instruments that enable traders to gain a greater market exposure without increasing their initial investment. In this case, the investor uses leverage.

The characteristics of leveraged products can differ according to the nature of the instrument and the underlying. These can be OTC (over the counter) exchanged, that is to say they are not exchanged into a regulated market but between different counterparties, as in the case of FX, FX options and CFDs, or exchange traded, meaning that they are traded into a regulated exchange, as for futures and listed options. Some have a defined term, others expirations, like options, or can have knockout levels and strike prices.

However, what they all have in common is the fact that investing in such products increases the risks. Leveraged products require a smaller amount, usually calculated as a percentage, of the total value of the position to be blocked and kept in the account as a guarantee to open and maintain the position. This amount is called margin.

Leveraged products can be used for different strategies. For example when an investor has strong conviction for a certain market outcome, he can use the leveraged investment product to produce higher returns in relation to the invested capital. Other investors use them to hedge existing positions, or for short-term investments.

Leveraged products carry an increased level of risk for the investor, as the exposure is calculated not on the margin, but on the total nominal value of the position opened. This means that the Profit and Losses are calculated on the total exposure (or total size) of the underlying asset that the leveraged product is based on.

Therefore, if the position is too big or too much leverage is used compared to the capital invested, even a relatively small movement of the underlying asset can cause a leveraged product to move in such a way that the deposit of the investor can be wiped out.

The makers of leveraged products are specific licensed agents, that can also be offered and distributed to investors by banks, investment firms, insurance companies or brokerage firms active in the financial markets.

Leveraged products should always be offered to the relevant target investor group by highlighting not only the benefits of the respective leveraged instrument, but also by making the trader well aware of the risks of each specific leveraged product and explaining the meaning and the use of margin.