Recently, many beginners have been asking about what leverage means. It actually refers to using borrowed money to amplify investments. It sounds very tempting, but the risks behind it also multiply exponentially.

Let me give you the most straightforward example first. Suppose the Taiwan index futures are at 13,000 points, with 200 yuan per point, and one contract is worth 2.6 million yuan. But you don't need to pay the full amount; with only 136k yuan in margin, you can control this 2.6 million yuan asset, which is about 19 times leverage. Does that sound exciting?

Now, suppose the Taiwan index rises by 5%. Your 136,000 yuan principal can earn 130k yuan, with a return rate close to 96%. But conversely, if the index drops by 5%, your principal is almost completely wiped out. This is the true meaning behind leverage—both gains and risks are amplified at the same time.

I have seen too many people get liquidated because they didn't understand this point. There was a typical case of a Korean YouTuber who, in 2022, used 25x leverage to go long on Bitcoin during a live stream. When BTC fell below $40k, he lost over 10 million USD within a few hours. He even added more leverage and was finally liquidated again. This isn't an isolated case; similar stories happen every day in the market.

So, where exactly are the real risks of using leverage? First is liquidation. When your losses exceed your margin, the broker will forcibly close your position, known as a "margin call" or "liquidation." If you can't quickly add funds to cover the loss, you'll truly lose everything.

Common leverage tools in the market include futures, options, leveraged ETFs, and contracts for difference (CFDs). Futures are standardized contracts traded on exchanges with settlement dates; options give you the right but not the obligation to buy or sell at a certain price, allowing control of larger positions at lower costs; leveraged ETFs are convenient but have high trading costs, usually 10 to 15 times that of futures; CFDs are more flexible, with no settlement date, and a wide variety of underlying assets.

If you really want to use leverage, my advice is: first, start practicing with low leverage—don't jump straight to 20x; second, always set a stop-loss point and stick to it strictly—don't be soft-hearted; third, ensure you have enough funds to handle market volatility—don't put all your assets at risk.

Leverage itself isn't a bad thing; the key is how you use it. If you can control the risks, moderate use of leverage can indeed increase your returns. But the prerequisite is that you truly understand what leverage means and what risks you're taking on. Many people only see the magnification of gains, ignoring that losses are also amplified, and in the end, they become market nutrients.

So before you decide to use leverage, ask yourself: Am I really prepared? Can I bear this risk? If the answer isn't yes, then start by not using leverage first.