Leverage is used when investing in financial markets, mainly forex. It multiplies the capital invested. This allows investors who do not have much capital to invest effectively, also those who like riskier investments can implement that strategies.

On such platforms you can usually choose the leverage for your account. In some countries you can find leverage even as high as 2000:1.

How does leverage work? It multiplies the available capital. For example, with a leverage of 30:1, each USD on your account has a purchasing power of 30 USD This means that by investing 10.000 USD you can make investments that would normally cost 300.000 USD.

In practice it looks like this:

The investor wants to open a Buy trade on the currency pair EURUSD in the size of 0.2 lot. The size of this contract is 20000 euros. If he did not use any leverage, he would have to invest this amount, in the case of a leverage of 1:10 the amount necessary for the investment is only 2000 euro, while in the case of a leverage of 1:30 it is only 667 euro. And if one uses a leverage of 1:100, then only 200 euros are needed to open such an investment.

Assuming that the opening price was 1.0978 and the closing price was 1.11 then such an investment will yield a profit of about 222 euros, regardless of the leverage used. However, since in the case of a leverage of 1:10 the margin is equal to 2000 euro, the profit is about 10%, while in the case of a leverage of 1:30 the margin is equal to 668 euro, so here the profit is about 30%.

Due to the fact that the leverage allows opening larger positions with less capital, the profits can be higher. At the same time it should be remembered that it is a double-edged sword - not only profits but also losses are bigger.

Explain financial leverage and how to use it properly