Leverage allows traders to control larger positions in the financial markets with a smaller amount of capital. Essentially, leverage is borrowed money provided by the broker, enabling traders to increase their exposure to a financial asset without needing the full amount upfront. It is commonly used in forex, CFDs, and margin trading.

How Leverage Works

Leverage is typically expressed as a ratio, such as 10:1 or 100:1. This means that for every unit of currency you put in, the broker lends you 10 or 100 times that amount, respectively. For example, with 100:1 leverage, a $1,000 deposit allows you to control $100,000 worth of an asset.

If the asset’s price moves in your favor, leverage amplifies the profits. However, if the price moves against you, it also magnifies losses. For instance, if you trade $10,000 worth of an asset with 10:1 leverage and the asset moves 1% in your favor, your profit would be $1,000 instead of $100.

Margin and Leverage

Leverage works by using margin, which is the portion of your account balance set aside to open and maintain a leveraged trade. If the market moves against your position, the broker may issue a margin call, asking you to deposit more funds to maintain your position or risk having it closed.

Risks of Leverage

While leverage can significantly boost potential returns, it also increases risk. Losses can exceed your initial investment, especially in highly volatile markets. This makes risk management, such as using stop-loss orders, critical when trading with leverage.

In summary, leverage allows traders to control larger market positions with less capital, but it also comes with higher risks, especially if not managed properly.