What does leverage mean? Leveraged investing is a double-edged sword that amplifies returns.

What does leverage really mean? Simply put, leveraged investing refers to investors borrowing funds to amplify their trading capacity, using less of their own capital to control a larger position, aiming to maximize returns with minimal investment. This approach is widely used in financial markets but also significantly increases risk. Imagine that if the market moves in your favor, leverage can magnify your gains—it’s tempting. But once the market reverses, not only can profits vanish, but your principal may also be lost entirely.

This article will explore the core meaning of leverage, how it works, potential risks, and strategies to manage them, helping investors apply leverage more rationally in the stock market.

The Core Concept of Leveraged Investing: The Principle of “Getting Big with Small”

Leverage means “borrowing money to invest,” using margin mechanisms to increase trading size. Ancient philosopher Archimedes said, “Give me a place to stand, and I will move the Earth.” The leverage principle in financial markets has similar power.

Practical Example:

Suppose you have 100,000 yuan of your own funds and borrow 900,000 yuan, making a total investment of 1 million yuan. You are using 10x leverage. This means controlling a position ten times your own capital with only 10% of the total as your own funds.

Common leverage tools include:

• Margin trading of stocks: Borrowing from brokers to buy more stocks
• Futures and options trading: Derivatives inherently carry leverage
• Contracts for Difference (CFD): Allowing trading larger positions with smaller margin

Note that leverage and margin are different concepts. Leverage refers to the debt you take on, while margin is the collateral you must deposit to open a position. They are related but distinct.

Risks of High Leverage: Liquidation and Capital Management Challenges

Leverage not only amplifies gains but also doubles the risks. During volatile markets, the most feared event is “liquidation” (margin call)—when losses exceed your margin, brokers will forcibly close your positions to protect themselves, rapidly reducing your capital.

Real Case Warning:

In 2022, Korean YouTuber Satto conducted high-leverage Bitcoin trading live, using 25x leverage to go long BTC. When Bitcoin’s price dropped from $41,666 to below $40,000, he failed to cut losses timely and even added more leverage, resulting in over $10 million in losses within hours. This case highlights the disastrous consequences of uncontrolled leverage.

Many young investors enter the market with the mindset of “win big if I win, no need to add funds if liquidated,” but the reality is harsh. The higher the leverage, the greater the potential gains and risks. A wrong market judgment can wipe out your capital instantly.

Comparison of Leverage Gains and Risks:

For example, Taiwan index futures:

• Recent closing price: 13,000 points
• Value per point: 200 yuan
• Total contract value: 2.6 million yuan
• Margin requirement: 136,000 yuan
• Leverage ratio: approximately 19.11x

Scenario 1: Up 5%

• Profit: (13,650 - 13,000) × 200 = 130,000 yuan
• Return on margin: about 96%

Scenario 2: Down 5%

• Loss: 130,000 yuan
• Nearly wipe out the margin, risking total loss

This stark contrast shows leverage’s double-edged nature: high returns come with high risks.

Comparing Leverage Tools: Futures, Options, CFDs, and Leveraged ETFs

Leverage manifests differently across various investment instruments. Understanding each tool’s characteristics is crucial for choosing the appropriate leverage method.

Futures: Standardized Contract Leverage Trading

Futures allow parties to agree to buy or sell at a set price at a future date, traded on exchanges via standardized contracts. Common underlying assets include:

• Metals: Gold, silver, aluminum
• Indices: Dow Jones, S&P 500, NASDAQ, Hang Seng
• Agricultural products: Wheat, soybeans, cotton
• Energy: Oil, natural gas, coal

Futures can be closed before expiry or rolled over. Settlement occurs at expiration based on spot prices, which can introduce unpredictable settlement risks during volatile markets.

Options: Flexible Rights-based Leverage

Options give the holder the right (not obligation) to buy or sell an asset within a certain period. Compared to futures, options offer more strategic flexibility and asymmetric risk profiles.

CFD (Contracts for Difference): Popular Overseas Investment

CFDs allow traders to speculate on price movements of various assets without owning the underlying. Features include:

• No expiry date, no rollover issues
• Non-standardized contracts, terms vary by broker
• Wide asset coverage: stocks, metals, commodities, indices, forex, cryptocurrencies
• Margin trading enables controlling large positions with small capital

Leveraged ETFs: Convenient for Short-term Trading

Leveraged ETFs are funds designed to amplify the daily returns of an underlying index (e.g., 2x, inverse 1x). Suitable for active traders but with caveats:

• Performance can be poor in sideways or choppy markets
• Trading costs are 10-15 times higher than futures, which is often criticized

Advantages and Disadvantages of Leveraged Investing

Core Advantages

Enhanced Capital Efficiency: Leverage allows small investors to participate in large trades, saving transaction costs and improving capital utilization.

Magnified Profits: Without leverage, your investment equals your capital; with leverage, you can control larger positions. Profits are multiplied accordingly.

Main Disadvantages

Increased Risk of Liquidation: Higher leverage means larger position sizes relative to your capital, increasing the chance of margin calls.

Losses Are Multiplied: When trades go against you, losses are amplified, potentially leading to significant account depletion. Proper risk management and stop-loss strategies are essential.

Strategies for Risk Control and Practical Tips

Renowned investor Robert Kiyosaki emphasized that moderate leverage can boost returns if used wisely. The key is to manage borrowed funds properly to grow wealth without losing capital.

Core risk management tips:

1. Start with low leverage: Beginners should begin with 1-2x leverage, gradually gaining experience. Avoid high leverage from the outset.
2. Maintain sufficient capital: Always have enough funds to withstand market fluctuations.
3. Set strict stop-loss points: Predefine exit points to limit potential losses.
4. Avoid over-leveraging and overconfidence: Excessive leverage combined with lack of strategy often leads to catastrophic losses.

Leverage is a double-edged sword—if used carefully, it can be a powerful tool for wealth growth. When controlling risks and applying leverage prudently, it becomes a means to enhance returns without undue danger.

Remember: The true meaning of leverage isn’t just borrowing to amplify trades but balancing risk and reward through wise decision-making. Start with low leverage, always remember to set stop-losses—this is the golden rule every leveraged trader must follow.