What Is Leverage in Trading? A Beginner's Guide (and Why It's Risky)

When you trade on margin, you deposit part of a position's value and borrow the rest from your broker, with the securities serving as collateral for the loan. FINRA explains that your deposit is your equity in the account and the loan is secured by what you buy. Leverage is simply the ratio between the position size you control and the money you put up: the larger that ratio, the more each price move affects your equity.[1]

The CFTC describes the same effect in futures and leveraged products: participants fund only a fraction of the underlying value, which creates leverage, and leverage amplifies the underlying risk. When prices move in your favour, a small deposit can produce a larger profit; when they move against you, you may be forced to add funds or close out—and can lose more than you initially put in. That symmetry is the whole point to understand.[2]

Leverage is often sold on its upside, but the risk is that it magnifies losses just as much. A move that would be a small loss in a cash account can wipe out a large share of a leveraged deposit. Because the loss is measured against your own smaller stake, a modest adverse move can represent a heavy percentage loss of your capital—and, unlike a cash position, a leveraged one can leave you owing more than you deposited.[2] [3]

This is why leverage and frequent trading are a risky combination. The SEC warns that day trading can be extremely risky, and adding leverage raises the stakes of every decision. Leverage does not improve your edge or your discipline—it only enlarges outcomes. If a strategy is not reliably profitable without leverage, using leverage does not fix it; it makes the losses arrive faster and larger.[4] [5]

When the value of a leveraged position falls, so does the collateral behind your loan. FINRA explains that if your equity drops below the required maintenance level, you can receive a margin call requiring you to deposit more funds or securities. Under intraday margin requirements you may need to maintain adequate equity throughout the day, not only at the close—so a fast move can trigger a call quickly.[1]

Crucially, the firm can force the sale of—liquidate—securities in your account to meet its requirements, and it may not be obligated to warn you first or to give much time. That means a leveraged position can be closed at the worst possible moment, locking in a loss you did not choose to take. You can even receive a margin call without trading, if the firm raises its requirements. Understanding this before you use leverage is far cheaper than learning it live.[1]