What is leverage?

Leverage in trading refers to the use of borrowed funds to increase the potential return on an investment. It allows traders to control a larger position in the market than the amount of capital they have available. Typically expressed as a ratio, such as 1:100, this means that for every dollar of capital, a trader can control $100 in market position. While leverage can magnify profits, it also increases the potential for losses, which can exceed the initial investment. Therefore, understanding leverage is crucial for managing risk effectively in various financial markets.