What Is Leverage?

Leverage refers to a loan a broker provides on an exchange during margin trading, allowing traders to access additional funds for their trades.

In the context of trading, leverage represents the extent to which a trader’s position and potential profitability are amplified through the borrowed funds.

Financial Leverage

Financial Leverage | Source: Investopedia

Understanding Leverage

Leverage can also refer to the amount of debt a company borrows to finance its assets.

Investors utilize leverage to increase their buying power in the market.

The initial amount that the trader puts in is called margin, which serves as collateral in case the value of the cryptocurrency or asset being traded experiences a decline.

Amplifying Gains and Losses

Margin trading carries significant risk as it can magnify both profits and losses.

This strategy can be employed for both long and short positions.

Shorting is used when a trader expects prices to fall, while going long is a strategy applied when the price of a cryptocurrency is anticipated to rise.

The level of leverage available to an investor depends on the trading platform they use and the specific digital asset they wish to trade.

Some countries have implemented regulations to restrict margin trading due to concerns about potential substantial losses among inexperienced investors.