What is leverage?

CFD trading is an example of leveraged trading, which means that your exposure to the underlying market is disproportionately large compared to the size of your initial deposit – greatly magnifying your potential profit or loss

Leverage is best explained using an example.

Unleveraged shares vs trading with leverage

Let’s say you have $1000 to invest. Traditionally, you might approach a stockbroker and use your money to buy 1000 shares in a company trading at $1 per share. Your exposure here is $1000, and for every cent, or point, the share price rises/falls, you make/lose 1000 x $0.01 = $10.
Importantly, the most you can possibly lose in this case is $1000 (should the share price fall to zero).

If, on the other hand, you had gone to a trading provider offering, for instance, 20:1 leverage on the same shares, you could have gained the equivalent exposure for a deposit, or margin, of just $50. This would be enough to open a trade worth $10 per point – such that for every point the share price rises/falls, you make/lose $10.

Leverage of 20:1 means that a deposit of $1 gives you $20 exposure in the underlying market.

Another more risky, but potentially more profitable, approach would have been to use your entire $1000 as margin to open a single trade worth $200 per point, or giving you exposure of $20,000 in the underlying market.

If you had done this, each point of movement in your favour would generate 20 times as much profit compared to the unleveraged scenario – for the same initial outlay. 

But the same is true for your potential losses. The market would only have to move against you by five points to wipe out your entire $1000 ‘investment’.
And should the market move extremely quickly, or 'gap' suddenly between two prices, you could potentially lose an awful lot more. In the absolute worst case scenario, with the underlying share price falling to zero and neither you or IG being able to close the position, you would lose your full exposure of 100 x $200 = $20,000.

How much leverage can you get?

You’ll find the degree of leverage you can get will vary according to the conditions of the underlying market and the size of your trade

Generally speaking, the more volatile or less liquid an underlying market – or the larger your trade – the lower the leverage on offer, as we seek to protect you, and ourselves, from the effects of large and rapid movements in price.

It’s not unusual to find leverage of 50:1 offered on extremely liquid markets, like popular forex pairs. 

Here’s how different degrees of leverage affect your exposure (and thus profit potential and maximum loss) for an initial investment of $1000:


Unleveraged trading Leveraged trading
  1:1 20:1 50:1
Investment $1000 $1000 $1000
Exposure $1000 $20,000 $50,000

Discover our free trading courses

Learn from our experts at IG Academy, with step-by-step online courses, plus webinars and seminars designed to help you build your trading skills.

You might be interested in...