Why do some people use leverage to trade stocks and other assets?
In financial markets, the method of using a small amount of capital to control a larger position is called leverage trading. Simply put, it involves borrowing funds from a broker to amplify your trading size. For example, with 100 euros and a 1:10 leverage ratio, you can control a position worth 1,000 euros. This concept comes from the leverage principle in physics — a small force can move a large object through a lever.
The core purpose of using leverage to operate stocks and other assets is straightforward: to earn more profit with less money. This is especially attractive to traders with limited funds. But this "double-edged sword" also means that your losses can be amplified as well.
The real working logic of leverage: margin and leverage ratio
The first step in understanding leverage trading is to grasp two key concepts.
Margin (Margin) is