What is leverage? Margin, amplified returns and liquidation risk

Leverage is the use of borrowed funds to take a position larger than your own capital would allow. A broker or exchange lends you the difference, and you put up only a fraction of the total as a deposit.

It is quoted as a ratio. With 10x leverage, 1,000 dollars of your own money controls a 10,000 dollar position. Leverage is common in forex, futures, CFDs and crypto derivatives, and many brokers also offer it on stocks.

The deposit that secures a leveraged trade is called margin. The initial margin opens the position, and a smaller maintenance margin is the minimum equity you must keep while it stays open.

Position size = margin × leverage
Return on margin ≈ price change % × leverage
Example: 10x leverage, price falls 10% → about −100% of margin

Because your profit or loss applies to the whole position but your capital is only the margin, results are magnified by the leverage ratio:

When losses eat into your margin and equity drops below the maintenance level, you receive a margin call or the platform closes the position automatically. This forced closing is called liquidation, and it locks in the loss.

The higher the leverage, the closer the liquidation price sits to your entry price. At 20x, a move of roughly 5% against you can be enough. In volatile markets such as crypto, sudden spikes can trigger liquidation even if the price later recovers.

Many traders use low leverage, set a stop-loss, and size positions so that a loss stays small relative to the whole account. Keeping spare funds as extra margin moves the liquidation price further away.

Leverage also carries costs: interest or funding fees accrue while a position is open. Beginners are often better served by trading without leverage until they understand how fast losses can build.