Leverage is when someone borrows money or uses borrowed capital to make a larger investment than they could with their own funds. This lets a person or a company try to increase the size of a gain, but it also increases the size of possible losses.
In trading and crypto, leverage means borrowing money from a broker or platform so you can open bigger trades than your cash balance allows. Traders use leverage to get more exposure to price changes than their own money would provide.
Each type increases your exposure in its own way, but the main idea is to use borrowed money to make price changes have a bigger impact.
To use leverage, you usually put up margin as collateral. The platform then lends you extra money, so your trade is bigger than what you could do with just your own funds. Leverage is often shown as a ratio or an “X” multiplier. For example, 50X leverage means that with 100 dollars, you can open a 5,000 dollar position. If the market moves your way, your gains are bigger. If it goes against you, your losses grow faster and can use up your margin. If your margin drops too low, the platform can close your position.
Leverage increases both profits and losses. Even a small price move against you can quickly use up your margin. If your account does not meet margin requirements, you might be forced to close your position. Borrowing also means paying extra costs like interest or funding fees. In fast markets, prices can change quickly, making it harder to exit at the price you want. For companies, taking on too much debt can make it hard to pay back loans during tough times.
People often describe leverage with a ratio, like 2:1 or 50X. The word margin means the collateral you put up. Terms like long and short show which way you are betting. A margin call is when you need to add more money to keep your trade open. Liquidation is when the platform closes your trade automatically because your margin is too low. These terms help traders and managers understand exposure and risk.
Suppose a trader has 200 dollars and uses 10X leverage. This lets them open a 2,000 dollar trade. If the asset goes up by 5 percent, the trader gains 100 dollars, which is half of their starting money. If the asset drops by 5 percent, they lose 100 dollars. This example shows how leverage can make both gains and losses bigger.
Start with little or no leverage until you understand how margin, fees, and liquidation work on your platform. Read the rules about maintenance margin and funding costs. Remember, leverage is a tool that can increase both your rewards and your risks.
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