Leverage

From Traderpedia

Definition:
The financial advantage of an investment that controls property of greater value than the money invested.


Leverage allows one to seek magnified percentage returns on an investment by using borrowed funds, margin accounts or buying securities which require payment of only a fraction of the underlying security's value, such as rights, futures, warrants or options.

Leverage is of course a double-edged sword as a small price movement on a leveraged product can lead to large losses in a short time. Traders who are undercapitalised often use leverage unwisely, risking too high a percentage of their capital per trade, often with the result that they lose a large percentage of their pot in just a few trades.

[edit] Examples

Futures: The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade. For example, if the notional amount traded (also referred to as "lot size" or "contract value") is £100,000 and the required margin is £2,000, the trader can trade with 50 times leverage (£100,000/£2,000).