Imagine you want exposure to £100,000 worth of shares, but you only put down £10,000 of your own money. You are still controlling the full £100,000 position, even though most of it is effectively borrowed from your broker.
If the shares rise 5%, you are not making 5% on £10,000. You are making 5% on £100,000 – that is £5,000 profit on a £10,000 deposit. It looks attractive on the way up. The same structure works in reverse on the way down, which is where things start to matter more.
That structure is leverage.
What leverage actually is
Leverage is the use of borrowed capital to increase your market exposure beyond what your own funds would allow, usually expressed as a ratio – 10:1 means every £1 of your own money controls £10 in the market.
The key point is that leverage does not change the underlying asset, only the scale of your exposure to it. If the market moves 2%, you gain or lose 2% at 1:1, but 20% at 10:1. The exposure is multiplied in both directions.
What margin is and how it differs
The deposit you must put up to open and maintain a leveraged position is called margin – it is not the loan itself, but the collateral required to access it. Initial margin is what you need to open the position; maintenance margin is the minimum equity you must keep in the account to hold it open. If your equity falls below that level, you are no longer meeting the broker’s requirements to support the borrowed exposure.
How margin accounts work in practice
You open a leveraged position in shares worth £50,000 using 5:1 leverage, which means you need £10,000 margin to open it. If the position rises 4%, it becomes £52,000 – a £2,000 profit, which is a 20% return on your £10,000 deposit. If it falls 4%, you lose £2,000, which is a 20% loss on that same deposit.
Profit and loss are calculated on the full £50,000 exposure, not the £10,000 you put in, which is why your account equity moves far more violently than the underlying asset.
The margin call
A margin call happens when your account no longer has enough equity to support your open positions – your losses have reduced the margin cushion to a level where the broker is concerned the position may not be covered. At that point, you will typically be required to deposit more funds or close positions to reduce exposure. If you do neither, the broker can start closing trades automatically, often at the worst possible moment in the market cycle.
Where leverage appears across markets
CFDs offer leveraged exposure to shares, indices, and commodities without owning the underlying asset, while spread betting works similarly and is also margin-based. Forex markets typically allow high leverage because currency pairs tend to move in small increments, and futures carry natural leverage through contract size. Options provide it through the premium structure, though the risk profile behaves differently.
In the UK, retail traders are subject to FCA limits. Major forex pairs are typically capped at 30:1, with lower limits applied to more volatile assets such as equities and cryptocurrencies.
The double-edged sword
Leverage compresses the distance between small market moves and large account outcomes. A 10% move against a 10:1 leveraged position does not mean a 10% loss on your account – it means a 100% loss of the margin used to support that position, because the loss is calculated on the full notional value while your buffer is only the deposit.
There is also a psychological layer. A price swing that would normally be irrelevant suddenly feels significant, decisions become faster, and mistakes tend to compound under pressure.
Risk management basics
The simplest way to treat leverage is to assume you do not need all of it. A rule used by many traders is to risk only 1-2% of total account equity on any single trade, regardless of how much leverage is available – position sizing should be based on risk, not margin availability. Stop-losses should be placed before entering a trade, exposure should be reduced during volatile conditions rather than increased, and available leverage should rarely be fully utilised.
Leverage is not the problem. Overuse of it is.
Closing
Leverage is best understood as a force multiplier – it increases what already exists in your position, whether that is profit or loss, and margin is simply the cost of entry into that system. Used with discipline, leverage can improve capital efficiency. Used without restraint, it removes the distance between small market moves and large account outcomes.
The difference is not the instrument. It is the way it is applied.
