Leverage, or more precisely a financial leverage in trading, is a tool to multiply profits, though the risk of the corresponding multiplication of loss emerges at the same time. The leverage allows for the replenishment of equity by often much higher volume of external capital.

In a simplified way, the size of the leverage is directly proportional to the size of a profit or a loss. For example, if a trading transaction would close at a profit of USD 100, using leverage 1:5 the profit reaches USD 500 and leverage 1:100 would mean a profit of USD 10,000. Generating a loss of USD 100, however, would mean in case of leverage loss of the same volume as is the profit above.

Back to glossary