What is meant by leverage?

Leverage: In finance, leverage generally refers to borrowing money and combining it with original capital to increase purchasing power and invest it to generate greater returns. Leverage thus gives you the ability to maximize your capital and enter into large investments, while simultaneously receiving full profits, with a certain interest deducted from the borrowed amount.
However, leverage is currently gaining the most popularity in the financial markets. In trading, leverage is a tool that helps a trader enter into trades with more capital than they have in their brokerage account. Through leverage, the broker lends you additional funds, enabling you to increase your purchasing power and potential returns. In other words, leverage allows you to enter into large trades using relatively small capital.
In financial markets, leverage is determined relative to your initial capital. For example, if you open a brokerage account with $1,000 and choose a leverage of 50:1, every dollar in your account will be multiplied (thanks to leverage) fiftyfold. Therefore, you can enter trades of up to $50,000 with an investment of just $1,000. Similarly, if your balance is $1,000 and you choose a leverage of 200:1, you can enter trades of up to $200,000!
The concept of leverage in trading is linked to other concepts, the most important of which is margin. Margin is the minimum amount required to open a new trade. It serves as insurance or guarantee for opening and maintaining a position.
How leverage works
Let's take a simplified example to illustrate how leverage works in detail. Let's assume you have a $10,000 (ten thousand) trading account with a Forex broker. Let's also assume you decide to enter into a trade on the EUR/USD pair worth $10,000 (your entire capital). In this case:
If you are not using leverage, placing a trade of 10,000 EUR/USD requires putting up the entire trade value (i.e., 10,000 USD) to open that trade.
If you use leverage (50:1), the “required margin” will be 2% of the trade value, or just $200 to open and keep this position open.
If you use leverage (200:1), the “required margin” will be 2% of the trade value, i.e. only $50 of your balance to open this trade.
Note that the required margin percentage varies from one currency pair to another, and often ranges between 1% and 5% of the trade value.
Therefore, the lower the leverage used, the higher the margin required to enter a new trade, and vice versa.

The importance of leverage in trading and investing
The importance of leverage lies in its ability to help traders achieve significant profits with a small amount of capital. In the past, trading in financial markets was limited only to those with large capital. However, the situation has changed. Thanks to leverage, anyone can invest in stocks, currencies, commodities, and other markets, regardless of their capital.
On the other hand, using leverage helps magnify profits (or losses). Let's say you decide to enter into a $10,000 trade on the EUR/USD pair:
If you don't use leverage, you need to deposit $10,000 to open a trade. If the price moves in your favor by 1%, you'll make a profit of 1% of your capital, or $100.
On the other hand, if you use 100:1 leverage, you only need $100 to enter this trade. If the pair rises by 1%, you will gain 100% of the capital you allocated for this trade (i.e., $100)!
But beware: if you lose this trade, you will lose a significant portion of your capital. This is why leverage is often called a "double-edged sword"; it can multiply profits, but it can also multiply losses. Therefore, it is essential to thoroughly understand leverage, comprehend all the concepts surrounding it, and choose a leverage appropriate to your capital size and risk management plan.
Advantages of leverage
Helps those who do not have enough capital to enter into trades that are far greater than the value of the available capital.
It can multiply and maximize profits according to the power of the leverage itself.
Leverage increases liquidity and trading volume in markets and increases traders' risk appetite.
Disadvantages of leverage
As much as it multiplies profits, using leverage (especially if it is large) can multiply losses.
The higher the leverage, the higher the risk associated with it.
If the price moves against your trade, you may receive a margin call faster than if you were trading without leverage.
Which markets allow the use of leverage?
Leverage trading is possible in various financial markets, such as:
Stock markets.
Foreign exchange market (Forex).
Commodity markets (such as gold, silver, and oil).
Major indices (such as Dow Jones, Nasdaq, etc.).
Cryptocurrencies (such as Bitcoin and Ethereum).
How to get the most out of leverage?
To get the most out of leverage in trading, we must keep the following rules in mind:
Choose as little leverage as possible to avoid too much risk.
Follow a successful trading strategy and test it for a long period of time.
Formulate a strict capital management and risk management plan.
Remember: The vast majority of professional traders use small leverage, around 10:1, and often does not exceed 20:1.

In conclusion, we reiterate: Whatever the value of your capital, you can invest it in the financial markets thanks to leverage. While many brokerage firms may offer leverage of up to 400:1 or more, it's important to note that using high leverage is a double-edged sword; it can help double your profits or multiply your losses by the same amount. The higher the leverage, the higher the associated risks.