Recently, I’ve noticed that many beginner investors are still a bit confused about leveraged trading, so I want to share what leverage really means and the logic behind it.

Simply put, leverage is borrowing money to invest. If you have 100k yuan and borrow 900k yuan from a broker, using a total of 1 million yuan to trade, that’s 10x leverage. Sounds tempting, right? Using a small amount of money to control a large sum, and if the market moves in your expected direction, your profits can indeed multiply. But it’s a double-edged sword; losses are amplified as well, and one careless move can wipe out your entire capital.

I’ve seen many cases, and the most memorable one was a cryptocurrency trader who live-streamed a long position on Bitcoin in 2022, using 25x leverage. When Bitcoin dropped below $40k, he lost over 10 million USD within a few hours. That’s why leverage isn’t just about magnifying gains; it’s more important to understand the risks behind it.

When talking about leverage, we have to mention margin. These two concepts are often confused, but they’re actually different. Leverage refers to the debt you take on, while margin is the collateral you must put up. For example, suppose the Taiwan index futures are at 13,000 points, with each point worth 200 yuan. One contract’s total value is 2.6 million yuan. You don’t need to pay the full amount; just 136k yuan in margin is enough to control this 2.6 million yuan asset, which is about 19x leverage.

If the Taiwan index rises by 5%, you can earn 130k yuan on a 136,000 yuan investment, nearly a 96% return. But conversely, if it drops by 5%, your principal is almost wiped out. This is the core meaning of leverage—profits and risks are proportional.

Common leverage tools in the market include several types. Futures are the most traditional, traded on exchanges, with standardized contracts, allowing trading in forex, commodities, stock indices, and more. Options give you the right, but not the obligation, to buy or sell assets at a set price within a certain period. Leveraged ETFs are suitable for short-term trading, but their transaction costs are 10 to 15 times higher than futures, so they may not be cost-effective. There’s also Contract for Difference (CFD), which has become increasingly popular recently because of its trading flexibility, no settlement date, and ability to trade various assets.

However, regardless of which tool you use, risk management is the most important. The higher the leverage, the greater the risk of a margin call. My advice is that beginners should start practicing with low leverage, always set stop-loss points to control potential losses. Many young investors enter the market with the mindset of “win big if I succeed, and if I get margin called, I won’t add more money,” but the market is ruthless, and this mindset will eventually lead to losses.

Leverage itself isn’t a bad thing; used properly, it can indeed increase returns. But the prerequisite is that you truly understand what leverage means, know how to manage borrowed funds responsibly, and prepare for risks adequately. If you want to practice leverage trading strategies, start with a demo account to get familiar, and only use real money once you’ve mastered the skills. Remember, stop-loss is always the top priority.