How Margin & Leverage Work

Introduction

Leverage lets you control a larger position with a smaller amount of your own capital by borrowing. It's powerful — and dangerous. This lesson explains the mechanics and the math.

What Leverage Is

Leverage means using borrowing to increase your exposure. You put up a portion and the broker lends the rest.

Own capital:  $1,000
Leverage:     2x
Position:     $2,000 (your $1,000 + $1,000 borrowed)

The Math of Amplification

Leverage multiplies percentage moves relative to your own money:

Position $2,000 rises 10% -> gain $200 on your $1,000 = +20% (2x)
Position $2,000 falls 10% -> loss $200 on your $1,000 = -20% (2x)

Same 10% price move, but double the impact on your capital.

Margin and Interest

The broker charges interest on the amount you borrow. Over time, this interest is a cost you must cover from returns.

Requirement: Maintenance Margin

You must keep a minimum level of equity in the account (the maintenance margin). If your equity falls below it, the broker issues a margin call (next lesson).

The Danger

Leverage cuts both ways:

• Great when prices rise
• Devastating when they fall
• You can lose more than your deposit

Real-World Example

With 3x leverage you control $3,000 with $1,000. A 33% drop on the position means a ~100% loss of your money. A slightly bigger drop puts you negative. This is why unleveraged investing is the sensible default.

Summary

• Leverage = controlling more exposure than your capital by borrowing
• It amplifies both gains and losses proportionally
• You pay interest on borrowed funds
• Maintenance margin must be maintained
• Losses can exceed your deposit — leverage is high risk

Next Lesson

What happens when it goes wrong: margin calls and forced liquidation.