What does stock leverage mean? The trading secret of using little money to generate big profits

Leverage investing sounds enticing — with a principal of 100,000 yuan, you can control assets worth 1 million or even 10 million yuan. If the market moves in your favor, profits can double directly. But this double-edged sword also means losses can be amplified to unbearable levels.

What exactly does leverage mean? Why do investors use it?

Simply put, leverage investing is “borrowing to trade”. You don’t need to put up all your funds; just a portion as margin, and you can make larger investments in the market. This principle is like Archimedes said: “Give me a place to stand, and I can move the Earth” — using less force to leverage greater gains.

A real example: you have 100,000 yuan, borrow 900,000 yuan from a broker, and invest a total of 1 million yuan. This is 10x leverage. The core purpose of leverage is to make a small amount of money work for a big gain, amplifying investment returns.

Tools investors mainly use for leverage include:

• Margin buying stocks (borrowing money from brokers to buy more stocks)
• Futures trading (which inherently carries high leverage)
• Options trading
• Contracts for Difference (CFD)
• Leveraged ETF funds

There is a classic investment philosophy — not all borrowing is debt. If you use borrowed money for smart investments, let the money generate more money, and create stable cash flow, it becomes a tool for asset appreciation. But the premise is that you must know how to control risks.

Numbers speak: how leverage amplifies your gains and losses

Let’s do a concrete calculation with Taiwan index futures. Assume:

• Recent closing price: 13,000 points
• Value per point: 200 yuan
• Total contract value: 13,000 × 200 = 2.6 million yuan

When trading, you don’t need to pay the full 2.6 million yuan; just a margin (say, 136,000 yuan) to control this contract. Then your leverage multiple is:

2.6 million ÷ 136,000 ≈ 19.1 times

Now see how a 5% rise or fall makes a big difference:

Upside scenario: Taiwan index futures rise to 13,650 points

• Profit = (13,650 - 13,000) × 200 = 130,000 yuan
• With 136,000 yuan margin, earning 130,000 yuan yields a return of nearly 96%

Downside scenario: Taiwan index futures fall to 12,350 points

• Loss = (13,000 - 12,350) × 200 = 130,000 yuan
• Your principal is almost wiped out, approaching total loss

This illustrates the dual nature of leverage: high multiples magnify gains but also equally magnify losses.

The real trap of leverage investing: risk of liquidation

Many young investors approach leverage with a mindset of “win big if I win, no need to add funds if I get liquidated,” but they underestimate the market’s brutality.

What is liquidation? When your losses approach your margin limit, the broker will forcibly close your position to protect their funds. At this point, not only are profits lost, but your principal can also be swallowed up.

A real case happened in 2022. A Korean crypto investor used 25x leverage to long Bitcoin during a live stream, entering at $41,666. Suddenly, Bitcoin dropped below $40,000. Instead of cutting losses, he added more leverage to his long position. Within hours, he lost over $10 million, and viewers watched him get liquidated live.

This case reminds us: Excessive leverage + immature trading strategies = deadly mistake. Regardless of the asset traded, abusing unmanageable leverage can quickly destroy your account.

What leverage tools are available? What are their characteristics?

( Futures trading Futures are agreements between two parties to buy or sell at a predetermined price at a future date. The underlying assets are broad, including:

• Metals futures: gold, silver, aluminum, etc.
• Index futures: Dow Jones, S&P 500, Hang Seng Index, etc.
• Agricultural futures: wheat, soybeans, cotton, etc.
• Energy futures: crude oil, natural gas, coal, etc.

Advantages of futures include good liquidity and relatively low transaction costs. But note the settlement date; traders must decide to close or roll over before expiry.

) Options trading Options give traders the right (but not the obligation) to buy or sell an asset at a specified price at a future date. The key feature is limited risk — the maximum loss is the premium paid.

( Leveraged ETF funds In the ETF market, products like “2x leveraged ETFs” and “inverse ETFs” are common. These are leveraged funds suitable for more aggressive short-term investors. They perform multiples of the trend but have disadvantages: transaction costs are 10-15 times higher than futures, and during sideways or choppy markets, returns decline significantly.

) Contracts for Difference (CFD) CFDs allow investors to trade in both directions (long or short) using margin, without holding the actual assets, and without settlement dates. The underlying assets include stocks, precious metals, commodities, indices, forex, and cryptocurrencies. Some platforms support 20x leverage; for example, trading $113 worth of Amazon stock requires only $5.66 margin.

Pros and cons of leverage investing

Advantages:

• Improves capital utilization; small investors can make large trades
• Multiplies profits; the same percentage increase can generate higher absolute gains under high leverage

Disadvantages:

• Risks increase dramatically; higher leverage means higher chance of liquidation
• Losses are amplified; one mistake can wipe out the entire account
• Psychological pressure is high; high-risk trading can lead to poor decisions

Survival rules for leverage investing

If you decide to use leverage, remember these principles:

1. Start with low leverage Don’t jump straight to 10x or 20x leverage. First, use 2-5x to familiarize yourself with trading processes and market rhythm, so you can withstand losses.

2. Always set stop-loss points Stop-loss is the lifeline of leveraged trading. No matter how confident you are in your prediction, set a loss limit at entry, and stick to closing when the price hits that point.

3. Prepare sufficient funds High leverage requires quick margin replenishment during market volatility. Without enough backup funds, you have no right to play with high leverage.

4. Don’t be overconfident The market is always smarter than you. Even if you win ten times in a row, one big loss can wipe out all profits. Humility and respect for the market are essential.

Conclusion

Leverage is a powerful tool that can accelerate wealth accumulation or destroy your trading account in an instant. Using leverage moderately to increase returns is an option, but only if you have sufficient risk awareness, a complete trading system, and strong psychological resilience.

Remember: leverage is not forbidden, but it must be used wisely. Start with low multiples, stick to stop-loss, and always prepare for the worst-case scenario. Only then can leverage become your profit weapon rather than a deadly knife.