What Is Leverage? Learn How to Use Leverage Correctly in the Financial World

What Is Leverage?

Leverage is a financial concept that allows investors to control a larger position in the market than their actual capital would otherwise permit. In simple terms, it’s like “borrowing” funds from your broker to increase your buying power and potentially amplify your returns.

Here’s a quick example:

Let’s say you have $1,000 in available margin, and your broker offers 100:1 leverage. This means you can open a trading position worth $100,000—even though you only have a fraction of that amount in your account. ¹

What Is Margin?

Margin is the amount of cash that a trader must deposit with a broker as collateral to open and maintain a leveraged trading position. It’s not the full value of the asset being traded, but rather a “good faith deposit” that allows you to control a position much larger than your actual capital.

• If you want to open a $10,000 trade using 100:1 leverage, you only need to post $100 as margin.
• This margin acts as a security deposit. If the trade moves against you, the broker can deduct losses from your account in line with the platform’s risk management rules.

The Difference Between Leverage and Margin

• Leverage refers to the ratio of borrowed funds to your own capital (e.g., 1:100).
• Margin is the actual amount of money you need to put up to open the trade.

A Simple Example of How Leverage Works

• Let’s say you start with $100 in capital and use 100:1 leverage.
  This allows you to open a trading position worth $10,000.
• Now, if the price of the asset you’re trading increases by just 1%, your position would gain $100. That’s a 100% return on your actual capital.
• But the reverse is also true:
  If the price drops by 1%, your position loses $100—wiping out your entire investment in an instant.

Types of Leverage in Different Markets

Leverage is a widely used tool across various financial markets, with its highest utilization typically found in the Forex market. Forex brokers often offer extremely high leverage—sometimes up to 1:2,000—enabling traders to open large positions with only a small amount of capital. While this creates opportunities for amplified gains, it also carries a high risk of rapid losses if proper risk management isn’t in place.

In the gold market, leverage tends to be more moderate, commonly in the range of 1:100 to 1:200. This level still allows traders to significantly increase their exposure, especially during periods of sharp price movements. Because of this volatility, leveraged gold trading is particularly popular among short-term speculative traders. ²

Learn more: Leverage in the Gold Market: Why Is It So Popular?

In contrast, traditional stock markets, particularly in the United States, tend to strictly limit the use of leverage. A standard margin account typically allows leverage of around 1:2 only. This restriction is intended to control risk for retail investors and help preserve overall market stability.

Meanwhile, the cryptocurrency market also offers access to high leverage—commonly 1:50 or even 1:100. However, the extreme volatility of crypto prices makes leveraged trading in this space significantly riskier. Investors should exercise caution and implement robust risk management plans before entering positions.

Each financial market offers different leverage levels depending on its structure and risk profile.
Learn more in: A Comparison of Leverage Across Financial Markets

Pros and Cons of Leverage

Pros of Leverage

• Increases order size without requiring a large amount of capital
• Enhances profit potential, even from small price movements
• Allows traders to learn and access financial markets with relatively low initial capital

Cons of Leverage

• High risk of losses, especially when using large leverage ratios
• Poor position sizing can result in a complete account wipeout within seconds
• May incur swap fees or interest charges for overnight positions (in some markets)

Additionally, there is something called a Margin Call, which is a warning from your broker that your account balance has fallen too low. If you don’t add more funds, the system will automatically close your positions to prevent further losses beyond your available margin.

If you're looking for a platform that helps you manage leverage like a pro—intuitively and efficiently—IUX is the solution for traders of all levels. With powerful tools to control order size, set precise Stop Loss and Take Profit levels, and a dedicated support team available 24/7, you can trade with confidence whether you're a beginner or a seasoned investor.

Start trading with IUX today and turn leverage into a tool for real opportunity.

Learn More About Using Leverage to Generate Real Profits in the Financial Markets

• $1 Billion in a Day: How Did George Soros Use Leverage?
• Does Warren Buffett Use Leverage in His Investments?
• The 10 Most Successful Investors Who Used Leverage in History

How to Manage Risk When Using Leverage

• Set position sizes appropriately (e.g., risk only 1–2% of your account per trade)
• Diversify your portfolio across multiple assets
• Always use a stop loss
• Have a clear capital management plan in place, including defined take-profit targets and acceptable loss levels before entering a trade ³

Leverage and Long-Term Investing

Whether leverage is suitable for long-term investing remains a topic of debate. Many experts argue that leverage should be used only in short-term strategies due to high market volatility. Holding leveraged positions for extended periods can increase the risk of losses from unexpected price swings. Additionally, hidden costs—such as overnight swap fees—can accumulate over time and erode overall returns. Without strong risk management, leverage is generally more appropriate for short-term trades than long-term holdings.

Learn more: Leverage in Long-Term Investing: Risk or Reward?

Summary

While leverage can significantly enhance investment returns, it can just as easily amplify losses if used without a solid risk management plan.

For beginner investors, starting with low leverage and consistently practicing disciplined portfolio management is a safe and smart first step toward navigating the financial markets and building a strong long-term foundation.

Note: This article is intended for preliminary educational purposes only and is not intended to provide investment guidance. Investors should conduct further research before making investment decisions.