How exactly do you play stock leverage? A comprehensive guide to understanding the truth and risks of high-leverage investing

When it comes to stock leverage, many retail investors are eager to try, but few truly understand how to use it properly. Many are attracted by stories of “small capital leveraging large returns,” but overlook the hidden risks behind them. Today, let’s have a thorough discussion about what stock leverage really is and what traps need to be avoided.

What is the essence of leveraged trading?

Simply put, stock leverage is borrowing money to invest. You use your own 100,000 yuan principal, borrow 900,000 yuan from the broker, and invest a total of 1 million yuan in trading—that’s 10x leverage.

This concept is old and simple—just like Archimedes said, “Give me a place to stand, and I can move the Earth.” In financial markets, the power of leverage is indeed astonishing, but it also hides deadly risks.

Many people have experience with margin trading, futures trading, options trading, etc., all of which utilize leverage principles behind the scenes. Even real estate investment is a typical leverage operation—using less of your own funds for the down payment, and borrowing large loans to buy property.

Leverage ≠ debt. The famous “Rich Dad” Robert Kiyosaki emphasized that those who know how to use leverage wisely can turn borrowed money into a continuous cash flow. A mortgage isn’t necessarily a liability; if the property generates rental income, it becomes an asset. That’s the clever use of leverage.

Leverage and margin: two concepts often confused

Many people treat leverage and margin as the same thing, but they are fundamentally different.

Leverage refers to the debt you assume, while margin is the collateral you must deposit to hold a position. Simply put, leverage is “borrowed money,” and margin is “pledged money.”

Using futures as an example makes it easier to understand. Suppose the recent closing price of the Taiwan index futures is 13,000 points, with each point worth 200 yuan. Then the total value of one futures contract is:

13,000 points × 200 yuan/point = 2.6 million yuan

You want to control this 2.6 million yuan asset but don’t need to pay the full amount—only a margin of 136,000 yuan. Your leverage multiple is:

2.6 million ÷ 136,000 ≈ 19.11 times

In other words, with 136,000 yuan, you control assets worth 2.6 million yuan.

Leverage is a double-edged sword: gains and losses are amplified

Let’s look at real scenarios:

Market moves as expected: If the Taiwan index futures rise by 5%, you earn (13,650 - 13,000) × 200 = 130,000 yuan, using 136,000 yuan of capital to make 130,000 yuan profit, nearly a 96% return.

Market reverses: If the index drops by 5%, you lose (13,000 - 12,350) × 200 = 130,000 yuan, almost wiping out your capital and facing total loss.

This illustrates the destructive power of leverage—higher multiples mean both potential gains and risks are magnified.

Common high-leverage investment tools

If you want to engage in leveraged trading, you need to understand what tools are available.

Futures trading

Futures are agreements where both parties commit to buy or sell at a predetermined price at a specific future date. They are traded on futures exchanges, using standardized contracts.

Futures cover a wide range of underlying assets—forex, commodities, stock indices, etc. Common examples include gold futures, agricultural futures (wheat, soybeans, cotton), energy futures (oil, natural gas), and index futures (Dow Jones, S&P 500, NASDAQ, Hang Seng Index).

Futures traders can choose to close or roll over their positions before expiry. Settlement is based on the “settlement price” in the spot market, which can be unpredictable if the market is highly volatile.

Options trading

Options give traders the right, but not the obligation, to buy or sell the underlying asset at an agreed price within a certain period. Options have higher leverage effects but also higher thresholds and complexity.

Leveraged ETF funds

In the ETF market, you’ll see terms like “2x leveraged ETF” or “inverse 1x ETF,” which are leveraged funds.

Leveraged ETFs perform magnified movements in trending markets but can underperform during sideways or volatile markets. They are more suitable for short-term trading. However, note that leveraged ETFs have extremely high trading costs—often 10 to 15 times those of futures trading—which makes them less suitable for long-term investing.

Contracts for Difference (CFD)

CFDs are very common on overseas broker platforms. They allow traders to conduct two-way trading (long or short) easily, without holding the actual assets, and without the settlement date issues of futures.

CFDs are not standardized contracts; trading conditions and contract specifications vary across platforms, offering more diverse products. Using margin, you can trade various global assets—stocks, precious metals, commodities, indices, forex, cryptocurrencies, etc. For example, if a stock is priced at $113, with 20x leverage, you only need $5.66 to trade one share.

Advantages and disadvantages of stock leverage

Advantages

The biggest benefit of using stock leverage is improving capital utilization. Small investors can use limited funds to make larger investments in the market, greatly reducing transaction costs.

At the same time, leverage can increase profit outcomes. Without leverage, your capital and trading size are equal; with leverage, you can trade $100 worth of assets with only $10 or even $1. Using the expected market movement, profits can multiply.

Disadvantages

The greatest risk is increased likelihood of liquidation. The higher the leverage, the larger the position relative to your account, and the faster you may face forced liquidation.

Second, leverage amplifies losses. Once losses occur, because of leverage, they are multiplied. You might make a wrong judgment and lose far more than expected.

Avoid these leverage trading pitfalls

Many young investors enter the market with the mindset of “win big and if I get liquidated, just don’t add more money,” but often end up with disastrous results.

A real warning example: a Korean YouTuber experienced a margin call during a live stream in 2022 while trading Bitcoin with high leverage, losing over 10 million USD within hours. He opened a 25x leveraged long at $41,666, but when BTC fell below $40,000, he added more leverage and was finally liquidated.

This reminds us that abusing uncontrollable leverage and immature trading strategies are deadly. When the market reverses, not only do profits vanish, but the principal can also be wiped out.

To avoid these traps, you should:

• Fully prepare for market volatility
• Strictly prohibit over-leverage and overconfidence
• Set stop-loss points to control losses
• Start practicing with low leverage

Conclusion: leverage is not the enemy, ignorance is

Leverage itself is not evil; when used properly, it can even enhance returns. The key is how to properly utilize borrowed money to truly increase wealth.

Opening leverage means risks and returns are multiplied, especially when leverage is applied to highly volatile products, which can lead to instant liquidation. Therefore, if you decide to use stock leverage, always start with low multiples and remember the importance of stop-loss.

Leverage is a high-risk tool, but not entirely useless. If you understand how to control risks and use leverage to increase returns, why not? The crucial point is discipline, planning, and preparation.