Recently, many people have been discussing stock leverage. In fact, this is like a double-edged sword: if you use it well, it can magnify your returns, but if you use it poorly, you can end up being liquidated. Today, I’m going to break this topic down piece by piece and make it clear to everyone.

At the end of the day, leveraged trading means borrowing money to invest. If you have 100,000 yuan and borrow 900,000 yuan from a brokerage, for a total investment of 1,000,000 yuan, that’s 10x leverage. The core principle behind stock leverage is actually very simple: using a smaller amount of margin to control a larger amount of assets.

Let me give you a real example. Suppose the Taiwan index futures’ closing price is currently 13,000 points, and each point is worth 200 yuan. Then the total value of one contract of Taiwan index futures is 2.6 million yuan. But you don’t need to pay the full amount—you only need to put up about 136,000 yuan as margin. In that case, you’re using nearly 20x leverage. Doesn’t that sound tempting?

Now let’s look at gains and losses. If the Taiwan index futures rises by 5%, you can earn 130,000 yuan using only 136,000 yuan in principal, for a return rate of nearly 96%. But conversely, if the Taiwan index futures falls by 5%, your principal is almost wiped out. This is the two-sided nature of leverage: both rewards and risks are amplified.

To be honest, a lot of young people get tempted by this kind of high return. They think that if they win, they’ll get rich, and even if they get liquidated, they don’t have to make up the money. But the market is ruthless. I remember a Korean YouTuber named Satto. In 2022, during a livestream trading crypto futures, when Bitcoin hit 41,666 dollars, he opened a 25x leveraged long position. As Bitcoin fell below 40,000 dollars, he was finally liquidated, losing more than 10 million dollars. This case tells us that abusing leverage and using immature trading strategies can be deadly.

There are many kinds of stock leverage trading tools. Futures are the most common, and the underlying assets include foreign exchange, commodities, stock indices, and more. Options give you the right to buy or sell at an agreed price at a specific time. Leveraged ETFs are suitable for aggressive investors, but their trading costs are 10 to 15 times higher than those of futures. Contracts for Difference (CFD) are currently popular with overseas brokers. They allow two-way trading without the need to hold the actual underlying assets.

The advantages of using leverage are obvious. You can make high-value investments with less capital, greatly improving capital efficiency. If you profit, your returns can increase many times over. But the disadvantages are just as clear: the risk of liquidation increases dramatically, and losses are also amplified. Once the market turns, not only do profits disappear, but your principal may also be gone for good.

So how can you use stock leverage safely? First, put up as much margin as possible to reduce the leverage multiple. Second, you must set a stop-loss point and strictly control the size of your losses. Most importantly, start practicing with low leverage, and always remember to use stop-loss.

In his book, Robert Kiyosaki mentions that using leverage in moderation is a good way to increase your rate of return, but the key is to make good use of borrowed money to grow wealth. Leverage itself is not a monster. As long as you control risk, clearly understand the characteristics of each leveraged trading tool, and then trade rationally, you can apply leverage more effectively in the market. Remember: risk management comes first, always.