The deeper meaning of leveraged investing: How to accurately apply leverage multiples in the stock market

In the financial markets, leverage refers to a trading strategy where investors borrow funds to amplify their trading size. Many professional traders rely on leverage to boost returns, but this double-edged sword has also swallowed countless people’s principal. What is the true meaning of leverage? How does it work? And what pitfalls should be avoided?

What exactly is leveraged investing?

Simply put, leverage is using borrowed money to expand the size of an investment. Suppose you have NT$100,000 in capital; by borrowing NT$900,000 from a broker, you can control NT$1,000,000 worth of assets for trading—this is called 10x leverage.

Ancient Greek mathematician Archimedes once said, “Give me a place to stand, and I will move the Earth,” and the power of leverage in financial markets is similarly astonishing. However, most people only see the profit-enhancing side of leverage and overlook the risk of magnified losses.

Leverage and margin are two concepts that are often confused. Leverage refers to taking on debt, while margin is the collateral an investor must deposit to hold a position. Understanding this distinction is crucial.

How is leverage multiple calculated? Case study analysis

Taking Taiwan index futures as an example, suppose the recent closing price is 13,000 points, with each point worth NT$200. The nominal value of one futures contract is:

13,000 points × NT$200/point = NT$2,600,000

In the futures market, you don’t need to pay the full NT$2,600,000 upfront. If the exchange requires a margin of NT$136,000, then your leverage multiple is calculated as:

Leverage multiple = NT$2,600,000 ÷ NT$136,000 ≈ 19.11x

This means you can control NT$2,600,000 worth of assets with less than NT$140,000 in capital.

Return and Loss Comparison

Upward Scenario: If the Taiwan index futures rise by 5% (to 13,650 points), your profit is: (13,650 - 13,000) × NT$200 = NT$130,000

Using NT$136,000 of capital to earn NT$130,000 profit yields nearly a 96% return!

Downward Scenario: If the futures fall by 5% (to 12,350 points), your loss is: (13,000 - 12,350) × NT$200 = NT$130,000

Almost all your principal is lost, approaching total wipeout.

This comparison clearly illustrates: the higher the leverage multiple, the greater the potential gains and risks are magnified proportionally.

How big are the hidden risks of leveraged trading?

The greatest risk of leverage trading is “liquidation” or “margin call.” When market movements go against your position and your account losses exceed the margin, brokers will forcibly close all positions to protect their interests, resulting in significant losses for the investor.

Real case warning

A well-known Korean YouTuber, Satto, conducted live crypto futures trading. He opened a 25x leveraged long position on Bitcoin at a price of US$41,666, expecting BTC to continue rising. However, the market moved against him; Bitcoin dropped below US$40,000. Not only did he experience liquidation, but during subsequent additional trades, he was liquidated again, losing over US$10 million within hours.

This case profoundly reveals: regardless of the asset traded, abusing uncontrollable leverage and immature trading strategies are fatal errors.

Overview of leverage trading tools

Futures trading

Futures are contracts where both parties agree to buy or sell at a predetermined price at a specific future date. Common futures include:

• Metal futures: Gold, silver, aluminum, etc.
• Index futures: Dow Jones Industrial, S&P 500, NASDAQ, Hang Seng Index, etc.
• Agricultural futures: Wheat, soybeans, cotton, etc.
• Energy futures: Crude oil, natural gas, coal, etc.

Futures are characterized by standardized contracts, centralized trading, and mandatory settlement. Traders should be aware of rollover and settlement price fluctuations.

Options (Derivatives)

Options give the buyer the right, but not the obligation, to buy or sell an asset at a specified price within a certain period. Compared to futures, options offer more flexible risk management but involve more complex pricing.

Leveraged Exchange-Traded Funds (Leveraged ETFs)

Market products like “2x leveraged ETFs” and “inverse 1x ETFs” are common. These funds are suitable for aggressive investors during clear trend periods but perform poorly in sideways or choppy markets.

The main drawback of leveraged ETFs is extremely high trading costs—often 10 to 15 times higher than regular futures trading costs—which can severely erode returns.

Contracts for Difference (CFD)

CFDs allow traders to go long or short without owning the underlying asset or dealing with futures rollover issues. They cover stocks, precious metals, commodities, indices, forex, and cryptocurrencies, offering high flexibility.

For example, if a stock is priced at US$100, using 20x leverage requires only US$5 margin to trade that stock.

Weighing the pros and cons of leveraged investing

Advantages of leverage

Enhances capital efficiency: Small investors can conduct high-value trades with less capital, significantly saving costs and improving capital turnover.

Magnifies profits: With US$100 principal, traders can control US$1,000 or even US$10,000 worth of assets. Profits are thus multiplied when successful.

Disadvantages of leverage

Rapid risk amplification: The higher the leverage multiple, the greater the chance of liquidation. In volatile environments, losses can occur instantly.

Losses spread quickly: Due to leverage, losses are magnified. A single misjudgment can wipe out the entire account.

How to safely apply leverage investing

1. Start with low leverage: Beginners should begin with 2x or 3x leverage, gradually gaining experience before increasing the multiple.

2. Set strict stop-loss levels: Regardless of leverage used, predefine clear stop-loss points to limit individual losses to no more than 2% of the account.

3. Maintain sufficient margin: Avoid full margin positions; keep enough buffer to handle market volatility.

4. Choose appropriate tools: Select futures, options, or CFDs based on your investment style, and understand each tool’s characteristics and cost structure.

5. Continuous learning: Practice thoroughly before real trading, understand market microstructure, and assess your risk tolerance.

Summary

Leverage is a powerful financial tool that can amplify returns while managing risk properly. However, many investors lack a deep understanding of leverage’s meaning and blindly pursue high multiples, ultimately becoming victims of the market.

The true leverage strategy is: every borrowed dollar should be used to generate cash flow, not for reckless gambling. As writer Robert Kiyosaki said, using leverage wisely can turn debt into assets, but only if you truly understand the essence of this tool.

In stocks, futures, or other derivatives trading, always remember: choose leverage multiples carefully, strictly execute stop-loss strategies, and continuously improve your trading discipline. This is the only way to survive and profit in leverage trading over the long term.