What is leverage? The meaning in one formula

Leverage is the ratio between the size of your position and your own money in it: leverage = position value ÷ your equity. Put up $5,000 and borrow $5,000 to buy $10,000 of stock, and you are at 2:1. Control a $30,000 futures contract with $3,000, and you are at 10:1. Margin is the money you put up, the collateral that makes the rest possible.

The effect on your result is a multiplication: the return on your money ≈ the price move × the leverage, before interest and costs. It works both ways, as the drawing at the top shows: at 10:1, a 5% rise makes 50% and a 5% fall loses 50%.

The number to remember is the wipe-out move, 1 ÷ leverage. At 2:1 a 50% fall erases your equity; at 10:1, a 10% fall; at 20:1, 5%; at 50:1, just 2%, and a single bad day can be enough.

Margin trading: margin accounts vs leveraged products

Two different things get called margin. In a margin account, your broker lends you money against your securities, and you pay interest on the loan. In leveraged products such as futures and forex, nothing is lent: the contract itself is large, and your margin is a deposit against losses. The main forms of leverage trading:

  • Margin account (stocks): under the Federal Reserve’s Regulation T, a broker can lend up to 50% of the purchase price of eligible stocks, so at most 2:1 when you buy. FINRA requires at least $2,000 in the account before margin trading. Short selling also needs a margin account; see short selling.
  • Futures: margin is a performance bond worth a small fraction of the contract, and gains and losses are settled every day. See futures trading for beginners.
  • Forex: in the US, NFA rules require a deposit of at least 2% on major currencies (50:1) and 5% on others (20:1). See forex trading for beginners.
  • Options: buying an option is leveraged, but the most you can lose is the premium you paid; selling options can lose many times the margin. See options trading for beginners.
  • Leveraged ETFs: they aim for a multiple of one day’s index return and reset daily, so the SEC warns that results over longer periods can differ significantly from that multiple.

The math of amplified gains and losses

Hypothetical: you have $10,000, borrow another $10,000 on margin and buy 400 shares at $50, a $20,000 position at 2:1. If the stock rises 20% to $60, the position is worth $24,000; after repaying the $10,000 loan you have $14,000, a 40% gain on your money. If it falls 20% to $40, the position is worth $16,000 and you keep $6,000, a 40% loss.

Interest runs either way. At a hypothetical 8% a year, the $10,000 loan costs about $800 a year, so a flat year is a loss of about 8% on your own $10,000. Losses are also harder to recover than they look: as the drawing shows, a 50% drawdown needs a 100% gain just to get back to the peak, and leverage makes deep drawdowns arrive faster.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn equity curve that peaks, falls through a shaded drawdown and recovers, with three bars: −10% needs +11%, −25% needs +33% and −50% needs +100% to get back to the peak.

Maintenance margin and the margin call

After you buy, the account must keep a minimum share of equity, the maintenance requirement. FINRA’s minimum for a margin account holding long stocks is 25% of their current market value. Brokers often set higher house requirements, such as 30% or 40%, and can raise them at any time without advance written notice.

Equity = market value − loan. In the example, the call comes when (market value − $10,000) ÷ market value falls below 25%, which happens at a market value of $13,333, a share price of $33.33, a 33% drop. Your $10,000 has shrunk to $3,333: a 67% loss on a 33% fall. With a 30% house requirement, the call comes sooner, at about $35.71. For a stock bought with 50% margin: margin-call price = purchase price × 0.5 ÷ (1 − maintenance %).

The call asks you to deposit cash or securities to restore the required equity. The equity line falls faster than the stock, as in the drawing, because the loan does not shrink when the price does. Since June 4, 2026, FINRA’s new intraday margin rules apply the maintenance requirement during the trading day too, with brokers allowed to phase them in until October 20, 2027; day trading for beginners covers the change.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn stock price line falling, with an account equity line below it falling faster; at a dashed maintenance level, a red bell reads margin call: add cash or positions are sold.

If you miss a margin call: liquidation

If you do not meet the call, the broker can sell your securities to restore the required equity. FINRA notes that a firm does not have to contact you first, can choose which positions to sell and does not have to grant you extra time. You can also lose more than you deposited.

Hypothetical failure case: the stock in the example closes at $40, then gaps down to $18 on bad news before anyone can act. 400 shares × $18 = $7,200, less than the $10,000 loan. Your equity is −$2,800: your $10,000 is gone, and you owe the broker $2,800 more.

Futures and forex run the same mechanism faster, because gains and losses are settled every day. When equity falls below the maintenance margin, you must top the account back up, and many brokers close positions automatically at a set level, as in the drawing.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn futures account-equity line falling past a dashed initial margin line and a lower dashed maintenance margin line; where it crosses below maintenance, a red marker reads margin call, with a note: losses are settled every day.

Why most beginners should avoid high leverage

Available leverage is what the broker allows; effective leverage is what you actually use. Beginners get hurt when they treat the first as a target. High leverage turns normal noise into account-sized losses and leaves no room for the mistakes everyone makes while learning:

  • Small moves become big losses: at 20:1, a 2.5% move against you costs half the account.
  • Forced selling tends to happen at the worst moment, near a low, and locks in the loss.
  • Gaps jump past stops, so the real loss can be several times the planned one.
  • Interest and financing costs eat returns even when the price goes nowhere.
  • Big swings in the account push emotional decisions; see trading psychology.

How to size a leveraged trade

Size from the stop and your risk per trade first, then check the leverage that results. On stocks, risking $200 with a $3 stop buys 66 shares; at $50 that is $3,300, which needs no leverage at all in a $20,000 account. The position size calculator does this math, and the risk management guide covers how much to risk.

The same steps for a leveraged product, with hypothetical numbers:

  1. Risk in money = account × risk %: $10,000 × 1% = $100.
  2. Stop distance from the chart: 10 points on a Micro E-mini S&P 500 contract ($5 a point) = $50 per contract.
  3. Size = $100 ÷ $50 = 2 contracts.
  4. Check effective leverage: 2 contracts at a hypothetical 6,000 control $60,000, 6 times the account.
  5. Check the gap case: a 5% overnight drop costs 300 points × $5 × 2 = $3,000, 30% of the account, far beyond the planned $100. If that is too much, trade fewer contracts or none.