What are leveraged products really? A practical overview for traders

Leverage products enable traders to control larger positions in the market with a smaller capital outlay. This initially sounds attractive – but reality is more complex. Those trading with these instruments must be aware that profits and losses are equally amplified. For beginners or those using retirement funds, long-term investments without leverage mechanisms are much better suited.

The Basic Principle: Debt Capital as a Multiplier

With leverage products, you work with borrowed capital from the broker. Instead of investing 1,000 euros yourself, you can control, for example, a 10,000-euro position – this is the so-called 1:10 leverage. The broker charges interest and reserves the right to liquidate the position if equity is insufficient to cover losses (Margin Call).

A Concrete Calculation Example

You have 1,000 euros in equity and want to open a 10,000-euro position with 1:10 leverage:

Scenario 1 – Profit:

• Price rises by 7 percent (from 10,000 to 10,700 euros)
• Your equity increases by 700 euros (from 1,000 to 1,700 euros) = 70% return

Scenario 2 – Loss:

• Price falls by 7 percent (to 9,300 euros)
• Your equity decreases by 700 euros (to 300 euros)
• To offset the loss, you would need over 200% gain afterward

This demonstrates the asymmetric risk: while profits are predictable, losses can quickly destroy the position.

What leverage products are there?

Stocks and Stock Derivatives

Stock CFDs allow speculation on price differences without ownership rights. Stock options give the right (but not the obligation) to buy or sell a stock at a set price and date. Leveraged ETFs (such as triple leveraged products) automatically multiply index movements. Margin trading lends capital to the trader for stock purchases – the broker sells off when value declines.

The risks are significant: private investors statistically lose money with stock options. Options lose value through time decay and decreasing volatility before becoming profitable.

Options and Warrants

These derivatives offer disproportionate leverage, as only a fraction of the asset as security (margin) is required. However, the risks are immense – most retail investors lose capital with them. Professional traders sell options (not buy) to profit from statistical probabilities.

Futures and Commodity Contracts

Futures are standardized contracts for future delivery or prices. Symbols like NQ (Nasdaq 100) or ES (S&P 500) enable speculative trading with high leverage. They are also used for portfolio risk hedging. However, trading requires deep chart technical understanding and strict risk control.

Certificates and Structured Products

Exchange-traded debt securities that mirror an underlying instrument. There are bonus certificates, barrier certificates, and discount certificates with different profit and loss profiles. These can also be leveraged.

Forex and Currencies

The largest global market – tradable around the clock. Allows extreme leverage (often 1:100 or higher), as only minimal margin is required. Used for currency speculation, hedging exchange rate risks, and international transfers.

Bonds and Fixed-Income Securities

Issued by companies and governments. Leveraged bond ETFs amplify interest rate movements. Less volatile than stocks, but leverage can also lead to disproportionate losses.

Cryptocurrencies

Bitcoin and Ethereum are highly volatile digital assets. Leveraged trading with cryptocurrencies is extremely risky. Volatilities can amount to 20-30% within hours – with leverage accordingly amplified.

Leverage Ratios and Their Effects

An investor with 1,000 euros can trade with different leverage levels:

• 1:5 leverage = 5,000 euro position, loss at 5% decline: 250 euros (Capital: 750 euros)
• 1:10 leverage = 10,000 euro position, loss at 5% decline: 500 euros (Capital: 500 euros)
• 1:20 leverage = 20,000 euro position, loss at 5% decline: 1,000 euros (Capital: 0 euros)

Plus interest costs on borrowed capital. The higher the leverage, the more likely total loss in unfavorable market movements. A small, carefully dosed leverage is always preferable – the chances of recovery after losses are significantly better.

Advantages: When leverage products make sense

Higher profit potential: Benefit from large price movements with a small investment.

Greater market presence: React more flexibly to opportunities, even with less equity.

Diverse strategies: Long- (rising prices) and short positions (falling prices) possible. Hedging strategies, such as securing a stock portfolio with futures.

Easy online access: Quickly and straightforwardly executable via trading platforms.

Lower fees: Often cheaper than other investment forms.

Risks: The dark side of leverage

Exponential loss risk: Capital can not only be exhausted – with certain products, you can lose more than you invested.

Small market movements = Large account effects: A 2% decline with 1:20 leverage means 40% account loss.

Psychological stress: Quick gains create overconfidence, quick losses lead to panic selling.

High complexity: Without precise understanding of how it works, you can be quickly knocked out.

Practical risk management rules

Rule 1: Set a stop-loss Every trade is based on a thesis (chart technical + fundamental analysis). Before entering: define profit target and stop-loss. The stop-loss should not be set too tight (otherwise it will be hit by normal fluctuations), but also not too wide (otherwise the trade doesn’t make sense).

Rule 2: Position sizing The loss of a trade should not jeopardize total capital and objectives. When correctly dimensioned, multiple consecutive stop-losses can be tolerated.

Rule 3: Test with paper trading Try new strategies first with virtual money (paper trading). Many brokers offer this free of charge – no real losses.

Rule 4: Keep leverage small An excessively high leverage leads to the account being unrecoverable after one or two losses. Preferably use 1:5 leverage with a high success rate rather than 1:20 with a high risk of failure.

Rule 5: Continuous education Beginners, advanced traders, and experts should regularly improve their skills. The goal: not to lose capital, but to steadily (if not explosively) build profits.

Conclusion: Use leverage wisely

Leverage products are powerful tools – but only suitable for those who fully understand the risks. The chances of disproportionate gains are real, but the risk is exponentially higher.

Never trade with money you cannot afford to lose. Inform yourself thoroughly, start with paper trading, and set your leverage based on your true risk appetite and proven trading strategies. Always remember: an excessively high leverage destroys a portfolio faster than any good strategy can rebuild it. Discipline, patience, and consistent risk management are more important than aggressive leverage ratios.

First steps to trading:

1. Register an account in minutes
2. Make quick deposits with various methods
3. Explore trading possibilities risk-free with a demo account