Leverage lets you control a bigger position than the money you put down, using money borrowed from your broker. It makes gains bigger, and it makes losses bigger too. That's why it's one of the first things a new trader should understand, and respect.
Leverage is a tool, and like most tools it can hurt you if you don't know how it works. Below I'll explain it in plain terms, show a worked example with simple units, and cover the limits and safeguards in place for retail traders.
Leverage vs margin
People mix these two up. Margin is the deposit you put up to open a position. Leverage is the size of the position compared with that deposit, shown as a ratio like 10:1. The smaller the margin needed, the higher the leverage.
Think of margin as a security deposit held by the broker while your position is open. If your position moves against you, the broker watches how much of that deposit is left.
A worked example in plain units
These numbers are illustrative, not a forecast. Say your broker offers 10:1. With a deposit of 1 unit, you control a position worth 10 units. If the market moves one tenth in your favour, your position gains 1 unit. That's the same size as your whole deposit.
Now flip it. If the market moves one tenth against you, your position loses 1 unit, which wipes out your deposit. So a small move against you takes a big bite out of the money you put down. Without leverage, you'd need a one-tenth move to lose a tenth of your money. With 10:1, the same move can take all of it.
Leverage in different markets
Forex
Currency pairs often move by small amounts, so brokers have traditionally offered higher leverage in forex than in most other markets. Small moves become bigger gains and losses, which cuts both ways.
Stocks
In shares, leverage usually comes through a margin account, where you borrow against what you already hold. You pay interest on the borrowed money, and the broker can sell your holdings if the account falls too far. Rules vary by country and broker.
Crypto
Some platforms offer margin or futures on crypto. Prices can move fast, so positions can be closed out quickly. Rules vary widely by country. In the UK, for example, the FCA has banned the sale of crypto derivatives to retail consumers.
CFDs and spread bets
A CFD (contract for difference) or a spread bet lets you take a position on a price without owning the asset. Leverage is built in. These products carry a high risk of quick losses, and regulators require firms to say so.
Limits for retail traders
Regulators know leverage can hurt beginners, so they cap it. The FCA in the UK and ESMA in the EU both limit the leverage firms can offer to retail clients, with lower limits for riskier or more volatile products. In the US, retail forex trading is overseen by the CFTC and the NFA, and CFDs are generally not offered to retail traders there.
Professional clients can sometimes get higher limits, but they give up some protections to do so. Retail clients regulated in the UK and EU also get negative balance protection, which means you shouldn't be able to lose more than your account holds. Always check your broker's terms, because the rules change.
Leverage also changes how you should think about being wrong. With a low ratio, a trade can go against you for a while and still recover. With a high ratio, the same swing may close the position before it gets the chance. That's why many experienced traders use far less leverage than their broker allows. They treat the maximum as a ceiling, not a target.
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Costs matter more with borrowed money too. Spreads, and in some markets overnight financing charges for keeping a position open, are charged on the full position and not just your deposit. Read your broker's terms so you know what holding a trade overnight involves.
Margin calls and stop outs
A margin call is a warning from your broker that your account is getting too close to the margin needed to keep your positions open. You can add money to the account or close positions. Some brokers don't send a warning at all, so read the terms.
A stop out is what happens if the account keeps falling. The broker closes your positions automatically, often starting with the biggest loser. In a fast market, this can happen before you've had time to react.
| Lower leverage | Higher leverage | |
|---|---|---|
| What a small move does | Changes your account a little | Changes your account a lot |
| Room before a margin call | More room to be wrong | Very little room |
| Risk of losing your whole deposit quickly | Lower | Much higher |
| Who it may suit | Beginners and anyone testing a plan | Experienced traders with strict risk rules |
Keeping leverage under control
- Start on a demo account until you understand how margin and stop outs work.
- Choose a lower leverage setting than the maximum the broker offers.
- Use position sizing: risk only a small part of your account on any single trade.
- Place a stop-loss on every trade. It's not a promise, because prices can jump past your level in a fast market.
- Never trade with money you need for bills, and never borrow to fund your deposit.
- Keep a journal so you can see what's working and what isn't.
If you're working with a small deposit, read this guide to trading with a small account first, because leverage tempts people most when money is tight.
Here's a simple test before you use leverage. Ask yourself what happens to your account if the market moves against you by a small amount, then by double that amount. If you can't answer without a calculator, use a smaller position. Brokers' platforms usually show the margin used and the free margin left, so get used to reading those numbers on a demo account.
The risk warning you'll see
Look at the risk warning on a UK-regulated CFD broker's site. The FCA requires firms to say that most retail accounts lose money when trading these products. That warning exists for a reason, and it isn't there to be skipped. If you run a trading business and want to share what you know, here's how to write for my forex section.
This is general information, not financial advice. Check the details with a qualified, regulated professional before you decide anything.
Frequently asked questions
Is leverage good or bad?
It's neither. Leverage magnifies results in both directions, so it can make gains larger and losses larger. Its risks are bigger for beginners, which is why regulators cap it.
What does 10:1 leverage mean?
It means a deposit of 1 unit controls a position of 10 units. A move of one tenth in the market changes your result by the whole size of your deposit.
Can I lose more than I deposit?
It depends on your broker and where you live. Retail clients regulated in the UK and EU should have negative balance protection, but check your broker's terms before you trade.
What is a margin call?
A margin call is a warning from your broker that your account is too close to the margin needed to keep your positions open. You can add funds or close positions to bring it back.
