Leverage involves using borrowed capital to increase potential returns from trading or investment activities. Leverage amplifies both profits and losses, allowing traders to control larger positions with smaller capital amounts. Common leverage sources include margin accounts, futures contracts, options, and leveraged financial products. Leverage ratios express the relationship between borrowed funds and equity capital.

Effective leverage management requires understanding risk tolerance, market volatility, and position sizing to prevent excessive losses that could lead to margin calls or account liquidation. Different instruments and markets offer varying leverage levels, from conservative real estate leverage to high forex and futures leverage. Regulatory requirements and broker policies limit available leverage based on account types and experience levels.

Real-world example: A trader with $10,000 uses 10:1 leverage to control a $100,000 position in EUR/USD, amplifying potential returns but also increasing loss potential, requiring careful risk management to prevent account depletion.