Leverage
Definition
Leverage allows you to control a larger trading position with a smaller amount of your own capital. While leverage can increase potential gains, it also increases potential losses by the same factor. For most retail traders, leverage is a risk-management issue first and a trading opportunity second, and broker leverage policies are a key differentiator when comparing platforms.
In Plain English
In plain terms, leverage is borrowed exposure. A broker lets you open a trade that is larger than your deposit by lending you the difference. For example, with 10:1 leverage, a £1,000 deposit allows you to control a £10,000 position. Any profit or loss is calculated on the full £10,000, not just your £1,000.
How It Works
- You deposit funds into your trading account; this is your own capital.
- The broker applies a leverage ratio (such as 2:1, 5:1, 10:1, or higher depending on the product and regulation).
- That leverage determines the maximum position size you can open relative to your deposit.
- When you open a trade, only a portion of the position value is set aside as margin; the rest is effectively borrowed exposure.
- Profits and losses are calculated on the full position size, not just the margin used.
- If losses reduce your account equity too far, the broker may issue a margin call or automatically close positions.
- Leverage limits, margin requirements, and close-out rules vary by broker, asset class, and regulatory jurisdiction.
Why This Matters for Traders
Leverage changes the risk profile of every trade. With higher leverage, even small market movements can have a meaningful impact on your account balance. This matters most for short-term traders, but even longer-term positions can be affected by leverage through drawdowns, margin requirements, and forced closures. Understanding leverage is essential for position sizing, stop-loss placement, and deciding whether a broker’s product offering matches your risk tolerance.
Common Misunderstandings
- Leverage increases profit without increasing risk: false—risk scales up in exactly the same way as potential returns.
- Higher leverage is always better: higher leverage increases flexibility but also increases the chance of rapid losses.
- Leverage is optional once enabled: even low leverage affects margin usage and liquidation thresholds.
- Brokers offering high leverage are more trader-friendly: high leverage can be a warning sign if risk controls and disclosures are weak.
- Leverage limits are the same everywhere: limits vary significantly depending on regulation, asset class, and client classification.
How This Affects Broker Choice
Leverage is a major broker-selection factor because it is closely tied to regulation and risk controls. Regulated brokers often impose stricter leverage limits for retail clients, especially on CFDs and FX. While this may seem restrictive, it is designed to reduce the likelihood of catastrophic losses.
When comparing brokers, users should look beyond headline leverage ratios and assess:
• Maximum leverage by asset class (FX, indices, commodities, shares).
• Whether leverage limits change during volatility or around market events.
• Margin close-out rules and negative balance protection.
• Whether leverage differs by account type or jurisdiction.
From a monetisation and comparison perspective, leverage content naturally links into broker reviews and comparison pages, where users can see how different platforms balance flexibility against risk controls.
Risks & Common Mistakes
• Using maximum available leverage without adjusting position size.
• Assuming leverage limits reflect safe trading levels rather than regulatory caps.
• Ignoring how leverage interacts with spread, slippage, and overnight financing.
• Holding leveraged positions through volatile periods without sufficient margin buffer.
• Choosing offshore or lightly regulated brokers solely for higher leverage access.
Risk note: leveraged trading can lead to losses exceeding initial expectations over short timeframes. Even with negative balance protection, rapid market moves and widened spreads can increase realised losses.
Real-World Example
Assume you deposit £2,000 and trade an index CFD with 10:1 leverage. This allows you to open a £20,000 position.
• A 1% move in the market equals a £200 profit or loss.
• A 5% adverse move equals a £1,000 loss—50% of your original deposit.
If the market moves sharply against you, your broker may require additional margin or automatically close the position to limit further losses. With lower leverage, the same market move would have a smaller impact on your account balance.
What to Check Before Trading
- What is the maximum leverage offered for each asset class you plan to trade?
- Is leverage capped by regulation in your jurisdiction, and does the broker comply?
- How much margin is required per position, and how is it calculated?
- At what point does the broker issue margin calls or force position closures?
- Does the broker provide negative balance protection?
- Does leverage change during volatile markets, news events, or low-liquidity periods?
- Are leverage terms clearly disclosed in the broker’s product documentation?
Related Concepts
Margin is the portion of your capital set aside when using leverage and determines how much exposure you can maintain.
Margin calls occur when leveraged losses reduce available equity, forcing traders to add funds or close positions.
This feature limits losses to deposited funds and is particularly important when trading with leverage.
Proper position sizing helps manage the risks introduced by leverage and reduces the chance of large drawdowns.
CFDs commonly use leverage, making it essential to understand how leverage applies to these products specifically.
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Risk Warning: This website does not provide financial, investment, or trading advice. All information is for educational purposes only. Trading and investing involve substantial risk of loss. You should carefully consider your financial situation and consult with qualified professionals before making any financial decisions.