This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Leverage, in stocks trading, is borrowing money from your broker to take a position larger than your cash would normally allow. The mechanics are simple, and the consequences are not. Most traders who lose money on leveraged positions did not get the mechanics wrong. They got the consequences wrong, because they treated leverage as a free amplifier of returns rather than a multiplier of risk.
The mechanical picture
You have €10,000 in your brokerage account. You want to buy €30,000 of a stock. You put up €10,000 of your own cash and borrow €20,000 from the broker. The position behaves as if you owned €30,000 of stock. If the stock rises 10%, you make €3,000 on a €10,000 cash outlay. If the stock falls 10%, you lose €3,000. If the stock falls 33%, your €10,000 of cash is gone and the broker starts to worry.
The 2:1 leverage in this example is the ratio of position size to cash. Most brokers offer higher ratios. With 5:1 leverage on the same €10,000, you control a €50,000 position. A 10% move in the stock is now a 50% move in your cash. A 20% move wipes out your account.
Why brokers offer it
Leverage is a competitive feature. Brokers compete on the leverage ceiling, the margin rate, the eligible instruments, and the margin call policy. The reason they offer it is that you trade more, generate more commission and more spread, and stay engaged with the platform. The broker makes more money when you use leverage than when you do not. That does not make leverage bad. It does mean the broker is not a neutral party on whether you should use it.
In some jurisdictions, regulators have stepped in. The European Securities and Markets Authority (ESMA) caps retail leverage at 1:5 for major stocks. The UK's FCA introduced similar caps after 2018. The Australian ASIC has applied a 1:5 cap to retail margin FX and CFD products. Offshore brokers still offer 1:100 or higher on US stocks through synthetic products, but the legal protection layer is much thinner.
The margin call
A margin call is the broker's way of saying that the cash in your account is no longer enough to support the borrowed portion of the position. The broker will ask you to deposit more cash, close part of the position, or both. The exact level at which a margin call fires is the maintenance margin, set by the broker and the regulator. On US stocks, it is often 25% of the position value. On a €30,000 position with €10,000 of your own cash, a 25% maintenance margin means a margin call fires if the position falls to €13,333, a 56% drawdown on the position.
If you do not respond to a margin call, the broker will close the position at the worst available price, lock in the loss, and charge a fee. The recovery from a forced close is harder than from a voluntary close, because the broker does not care about your strategy or your timeframe.
What makes leverage useful
Leverage is genuinely useful for short-horizon trades with a clearly defined stop. If you have a tight stop, a small position size, and a clear invalidation level, leverage lets you size the position to a meaningful return without committing most of the account. The arithmetic favours tight stops, low win rates, and a small account, where unleveraged position sizes would be too small to bother with.
Leverage is also useful for hedging. A short position against a long position in your portfolio can hedge market exposure without requiring the cash to take the short position at full size. The hedge is not free, and the financing on the short eats into the result, but for a hedged portfolio the leverage is a tool for cost efficiency.
What makes leverage dangerous
Leverage is dangerous when it is used to take a position larger than the trader would have taken with cash. If the unleveraged position size is what the trader would have used, leverage increases both the size and the risk in a way that does not match the trader's plan. The result is a position that is harder to manage, easier to be wrong about, and more likely to be closed at the worst moment by a margin call.
The dangerous pattern is the slow loser. The trade goes against the trader by 5%, they add leverage to make it back, the trade goes another 5% against them, they add more leverage, and the cycle ends in a margin call. The fix is to size the position to the stop and the account, not to the desired return.
Related resources
Where to start
If you are new to leverage, the safest first step is to set a position size rule. A common one is to risk no more than 1% of the account on a single trade, calculated as the distance from entry to stop. Then take the position at a size that produces the correct dollar loss at the stop. The leverage figure is whatever it needs to be to produce that dollar loss, not a goal in itself. Our broker comparison shows which brokers offer tier-one regulation with conservative leverage ceilings, which is usually the right starting point.