What is Leverage?
Leverage is using borrowed capital or financial instruments to increase the potential return on investment, simultaneously amplifying both gains and losses.
Leverage Explained
Leverage is a double-edged sword. 2:1 leverage doubles your exposure, meaning a 10% gain becomes 20% — but a 10% loss also becomes 20%. Options, futures, and margin all provide leverage. Professional traders use leverage carefully with strict risk management. Over-leveraging is one of the fastest ways to blow up a trading account.
Real-World Example
You have $10,000 and use 3:1 leverage to control a $30,000 position. A 5% gain yields $1,500 (15% return on your capital). A 5% loss costs $1,500 (15% of your capital). A 33% move against you wipes out your entire account.
Related Terms
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