Leverage
Using borrowed capital to increase position size — amplifying both gains and losses beyond your own equity.
Leverage is the use of borrowed capital (or derivatives) to control a position larger than your own cash would allow. A 10:1 leverage ratio means for every $1 of your own capital, you control $10 in position size.
Leverage amplifies both gains and losses proportionally. A 5% move in an asset becomes a 50% gain or loss on your capital at 10:1 leverage. This cuts both ways — leverage has destroyed more trading accounts than almost any other single factor.
Leverage is available through margin accounts, CFDs, forex brokers, futures, and options. Each instrument has different margin requirements and liquidation mechanics. Know your liquidation level before entering a leveraged trade.
Example
You have $10,000 and use 5:1 leverage to control a $50,000 position. A 2% favorable move = $1,000 profit (10% on your capital). A 2% adverse move = $1,000 loss (10% of your capital). A 20% adverse move wipes you out entirely.
Related Terms
Long Position
Buying an asset expecting its price to rise. You profit when the price goes up; you lose when it goes down.
BeginnerMargin
Funds deposited as collateral to open a leveraged position. If losses erode your margin, your broker may issue a margin call.
IntermediateShort Position
Borrowing shares and selling them, hoping to buy them back cheaper. Profit when the price falls; loss when it rises.
IntermediateVolatility
The degree of price variation over time. High volatility means bigger swings — more opportunity and more risk.
Intermediate