Why do Brokers Give You so Much Leverage?

By John Russell, About.com

Answer: Brokers make their money on the spread. They are happy to provide leverage to forex traders because the bigger the trade, the more the pips in the spread are worth.

For example, let’s say you used no leverage and were just trading a $1,000 account. You make a trade for the full amount of $1,000 and the spread is 3 pips. Each pip would be worth about 10 cents. The broker would make 30 cents as a payment for handling your trade. Let’s add some leverage now. You use the same $1,000 at 50:1 leverage. Now your trade on the market is worth $50,000. Each pip is now worth around $5! The broker makes $15 for handling your trade. The broker gets to keep that money whether you win or lose your trade. This is why you see some brokers out there offering 200:1 leverage. They can make the most money from your trading and at the same time make it very easy for you to trade by letting you open an account with a small amount of capital.