Leverage, also known as gearing, refers to the use of borrowed funds to increase the potential return of an investment. In trading and investing, leverage is typically used to amplify potential gains from a trade or investment, but it can also amplify potential losses.
Leverage is usually expressed as a ratio, such as 1:50, which means that for every dollar of capital, a trader can control $50 worth of assets. In this scenario, if the assets go up by 1%, the trader’s return would be 50%. However, if the assets go down by 1%, the trader would lose 50% of their capital.
Leverage is commonly used in trading forex, futures, and options, where small movements in the price of an asset can lead to significant profits or losses. It is important for traders to understand the risks associated with leverage and to use it responsibly.