The Ultimate Guide to Leveraged Investing: Master the Trading Secrets of Making Big Gains with Small Capital

What is leveraged investing? Why does this trading method appeal to investors yet hide risks? Simply put, leveraged investing is borrowing funds to expand trading size, using less of your own capital to control larger market positions. This approach is akin to Archimedes’ lever principle—apply a small force at the right point, and you can move the world. In financial markets, leverage can indeed amplify gains, but it also magnifies losses by the same multiple. This article will delve into how leveraged investing works, common tools, and how to scientifically use leverage while managing risks.

Core Principles of Leveraged Investing

The difference between leverage and margin is the first step to understanding leveraged investing. Leverage refers to the debt an investor assumes, while margin is the collateral required to open a position. They are related but distinct concepts.

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

13,000 points × NT$200/point = NT$2,600,000

In futures trading, investors do not need to pay the full amount upfront, only the margin. If the margin is NT$136,000, the leverage ratio is calculated as:

NT$2,600,000 ÷ NT$136,000 ≈ 19.11 times

This means the investor controls NT$2.6 million worth of assets with NT$136,000.

The dual nature of leverage is most evident in gains and losses:

If the Taiwan index rises 5%: (13,650 - 13,000) × NT$200 = NT$130,000 profit, nearly a 96% return on the principal.

If it falls 5%: (13,000 - 12,350) × NT$200 = NT$130,000 loss, almost wiping out the entire principal.

The higher the leverage multiple, the greater the potential gains and risks. This underscores the importance of risk management in leveraged investing.

Details of Leveraged Investment Tools

Modern financial markets offer various leveraged trading instruments, each with unique mechanisms and applications.

Futures trading is one of the most common leverage tools. Futures are contracts where both parties agree to buy or sell an asset at a predetermined price at a future date. They are standardized and traded on exchanges. Common futures 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)

Futures contracts specify the underlying asset, price, and expiration date. Traders can close or roll over positions before expiry. Settlement is based on the spot market closing price, which can lead to unpredictable settlement prices during volatile markets.

Options give traders the right, but not the obligation, to buy or sell an asset at a set price within a certain period. Options provide flexible risk management strategies.

Leveraged ETFs offer leverage in passive investment. These funds are labeled as “2x leverage,” “inverse 1x,” etc., suitable for more aggressive investors. While they amplify returns in trending markets, they perform poorly during sideways or choppy markets. Note that leveraged ETFs often have transaction costs 10 to 15 times higher than futures trading, which is a significant disadvantage.

Contracts for Difference (CFD) allow traders to engage in two-way trading (long or short) without owning the underlying asset, avoiding settlement or rollover issues. CFDs use margin to enable trading in stocks, precious metals, commodities, indices, forex, and cryptocurrencies globally.

Margin trading in stock markets involves borrowing funds or stocks from brokers to increase trading size. Day trading also falls under this category.

Risk Warning for Leveraged Investing

Liquidation (爆倉) is the most feared outcome for leveraged investors. When markets fluctuate sharply and investors cannot meet margin calls promptly, brokers will forcibly close positions, known as “liquidation” or “margin call.”

Real cases highlight the severity of risks. A Korean crypto trader once live-streamed a high-leverage Bitcoin trade. Opening a 25x long position at Bitcoin’s price of $41,666, when Bitcoin dropped below $40,000, the trader was liquidated and lost over $10 million within hours.

This case reveals two core issues: misusing unmanageable leverage and immature trading strategies are deadly mistakes. Many young investors think “if I win, I make a fortune; if I get liquidated, I just don’t top up,” but the market’s brutality often exceeds expectations.

Pros and Cons of Leveraged Investing

Advantages of leveraged investing mainly include:

First, improving capital efficiency. Small investors can use less capital to make large trades, significantly reducing transaction costs. For example, with just $100, one can trade products worth $1,000 or even $10,000.

Second, increasing profit potential. Leverage can multiply gains when the market moves in the right direction.

Disadvantages are equally clear:

Using higher leverage results in larger positions, increasing the risk of liquidation. Under the same position size, higher leverage means a higher chance of account margin calls.

Leverage amplifies losses. Once a trade incurs a loss, the effect of leverage will magnify it. Therefore, risk management and timely stop-loss are crucial.

Scientific Strategies for Using Leverage

Robert Kiyosaki, author of Rich Dad Poor Dad, pointed out that moderate use of leverage is a good way to increase returns. The key is not whether to use leverage, but how to properly utilize borrowed funds to grow wealth.

Practical recommendations include:

• Start with low leverage. Whether 1x or 20x, beginners should accumulate experience with lower multiples first.
• Always set a stop-loss. Predefine the maximum loss you can tolerate; exit immediately when reached to strictly control downside risk.
• Be prepared for volatility. Investors must have sufficient funds to withstand market swings, avoiding over-leverage and overconfidence that lead to high risks.
• Regularly reassess leverage ratios. Adjust leverage dynamically based on market conditions and personal risk tolerance.

Leverage is not an absolute taboo; when risks are controlled, moderate leverage can significantly enhance investment returns. However, investors must fully understand how leverage works, master the features of various leverage tools, establish comprehensive risk management systems, and develop disciplined trading habits. The power of leverage is indeed formidable, but it must be tamed carefully.