Does leverage mean amplifying returns? Analyzing the double-edged risks of leveraged investing

Many investors hear the term “leverage” when entering the stock market. But what exactly does leverage mean? Simply put, leverage involves using a smaller amount of capital to control a larger investment, aiming to maximize returns with less initial money. However, this “borrowed money” also brings corresponding risks—if the market reverses, not only can profits vanish, but the principal may also be lost entirely. In this article, we’ll explore the core principles of leveraged investing, its risk characteristics, and how to apply it correctly in practice.

How leveraged trading works—amplifying investment size with borrowed funds

Leverage = borrowing money to invest. For example, if you have 100,000 yuan in capital but want to invest in 1 million yuan worth of assets, you can borrow 900,000 yuan from a broker or exchange. This is how 10x leverage operates.

This concept isn’t a financial innovation. The ancient Greek mathematician Archimedes once said, “Give me a place to stand, and I will move the Earth.” In the investment world, leverage’s power is similarly astonishing—controlling a larger market value with relatively small capital.

Common methods investors use to leverage include:

• Margin buying stocks: borrowing funds from a broker to buy more stocks
• Using derivatives: such as futures, options, CFDs, which have built-in leverage mechanisms
• Leveraged ETFs: specially designed funds that automatically amplify index fluctuations

It’s also worth noting that companies often use debt financing for leverage, and individuals frequently leverage through mortgages. Renowned financial author Robert Kiyosaki once pointed out that loans aren’t necessarily liabilities—if investors use mortgage loans wisely, investing or renting out properties with borrowed funds can turn into cash-flow-generating assets.

The calculation logic of leveraged investing: how margin determines your risk

To understand what leverage means, you need to grasp the relationship between “leverage” and “margin.” Leverage refers to the amount of debt undertaken, while margin is the collateralized funds the investor must provide. They are related but distinct concepts.

For example, in Taiwan index futures:

Suppose the recent closing price is 13,000 points, with each point worth 200 yuan. The total value of one futures contract is:

13,000 points × 200 yuan/point = 2.6 million yuan

In futures trading, you don’t need to pay the full 2.6 million yuan upfront—only the margin, say 136,000 yuan. The leverage multiple is calculated as:

Leverage = 2.6 million ÷ 136,000 ≈ 19.11 times

This means controlling 2.6 million yuan worth of assets with just 136,000 yuan in capital. That’s how high leverage works.

But higher leverage means proportionally higher potential gains and risks:

If the Taiwan index rises 5%:
Profit = (13,650 - 13,000) × 200 yuan/point = 130,000 yuan
With 136,000 yuan capital, nearly 96% return.

If it falls 5%:
Loss = (13,000 - 12,350) × 200 yuan/point = 130,000 yuan
Almost the entire capital is lost, risking total loss of principal.

This example clearly shows: the higher the leverage, the greater the potential profit and risk. That’s why it’s recommended for investors to increase margin and reduce leverage ratios as much as possible.

Real liquidation case warning: why abuse of leverage leads to forced liquidation

The most terrifying outcome of leveraged trading is liquidation (also called “margin call”), where investors lose too much to meet margin requirements, and brokers forcibly close their positions.

In 2022, Korean YouTuber Satto livestreamed crypto futures trading and suffered a severe liquidation due to excessive leverage: he opened a 25x long position on Bitcoin at $41,666 expecting it to rise. When Bitcoin dropped below $40,000, he stubbornly added more leverage long positions, ultimately losing over $10 million USD within hours.

This case highlights a common problem: many young investors enter with the mindset of “winning big, and if liquidated, just re-enter.” But markets are brutal—when losses exceed margin, brokers don’t wait for your decision; they execute forced liquidation, and investors must bear additional losses.

Risks of leveraged trading include:

• Market volatility triggering margin calls
• Inability to top up margin leading to forced liquidation
• Chain reactions of losses: increasing leverage can lead to bigger losses
• Psychological factors: panic selling accelerates liquidation

Comparing popular leverage tools: futures, options, ETFs, CFDs

There are various leveraged investment tools, each with its characteristics:

Futures—standardized contracts, centralized trading

Futures are traded on exchanges via standardized contracts, committing to buy or sell at a predetermined price at a future date. Types include:

• Metal futures (gold, silver, aluminum)
• Index futures (Dow Jones, S&P 500, NASDAQ, Hang Seng)
• Agricultural futures (wheat, soybeans, cotton)
• Energy futures (oil, natural gas, coal)

Advantages: standardized, high liquidity, large trading volume. Risks: expiration dates require rollover, and spot prices at settlement can be highly volatile.

Options—more flexible hedging tools

Options give the holder the right (but not obligation) to buy or sell an asset at a specific price within a certain period. They are more complex and suitable for risk management but have a steep learning curve.

Leveraged ETFs—convenient but costly

Leveraged ETFs (e.g., 2x or inverse ETFs) are suitable for active short-term traders. They are easy to operate but have drawbacks:

• Underperform in sideways or choppy markets
• Transaction costs are 10-15 times higher than futures
• Not suitable for long-term holding due to decay and compounding effects

CFDs—covering global assets with high flexibility

CFDs allow traders to go long or short on various assets without owning the underlying. Different platforms offer diverse products, with flexible contract specifications.

Using margin via CFDs, traders can access global markets: stocks, precious metals, commodities, indices, forex, cryptocurrencies. For example, Amazon stock at $113.19, with 20x leverage, requires only $5.66 to trade one share, greatly lowering entry barriers.

Keys to successful leveraged investing: risk management and stop-loss

Regardless of the tool, the core to success is risk management.

Advantages of leverage:

• Increases capital efficiency, allowing small investors to trade large positions
• Amplifies profits, with returns multiplying on the same capital

Disadvantages:

• Higher leverage increases the chance of liquidation
• Losses are magnified, leading to bigger account drawdowns

Practical risk reduction tips:

1. Start with low leverage—1x or 2x helps you learn and gain experience
2. Always set stop-loss orders—predefine maximum loss levels and execute automatically
3. Maintain sufficient margin—preferably over-allocate margin to avoid margin calls
4. Use leverage judiciously—not all trades are suitable for high leverage, especially in volatile markets

Robert Kiyosaki believes that moderate leverage can boost returns, but the key is how to wisely use borrowed money to grow wealth. Once leverage is used, both risks and rewards are multiplied. In highly volatile products, leverage can quickly lead to liquidation. Therefore, start with low leverage and always remember to set stop-losses.

Leverage itself isn’t forbidden; it’s a tool that must be respected. If used to increase returns responsibly and with proper risk control, leverage can be powerful. But abusing high leverage and ignoring risk management will teach you an expensive lesson in the market.

Leverage means not just amplifying gains but also magnifying responsibilities—responsibility to manage risks, set stop-losses, and review your trading strategies. That’s the correct mindset for using leverage in investing.