How It Works
Leverage is a mechanism used in stock margin trading, FX, and similar products that allows an investor to trade an amount many times larger than a relatively small amount of their own funds used as collateral. Because it allows moving an amount larger than one's own funds, the range of fluctuation in gains and losses relative to price movements also becomes larger.
Risks
A leveraged trade produces larger gains if the market moves as expected, but if it moves in the opposite direction, losses are similarly amplified, and it is possible to incur losses exceeding one's own funds. Measures that take these risks into account are necessary, such as keeping the leverage ratio modest and managing funds with a comfortable margin.