Leverage

Leverage is the use of borrowed funds or collateral-backed contracts to control a position larger than the capital directly committed. Expressed as a ratio such as 5x or 10x, it magnifies the effect of price movements: a small favourable move produces an outsized gain relative to the capital posted, while an equally small adverse move produces an outsized loss.

Leverage is provided through mechanisms like margin trading and derivatives, where a deposit called margin backs the larger notional exposure. If losses erode the margin below a required level, the position may be liquidated. A common misconception is that leverage increases only potential profit; it amplifies losses in exactly the same proportion.