Complete Guide to Stock Leverage: From Principles to Risk Management in One Go

Why Anyone Fails: Starting Without Knowing Leverage

Leverage trading is highly tempting because it aims for big profits with small capital, but it is also an area where most beginners fail. Why is that? Because they overlook the simple fact that losses are amplified along with gains.

Whether it’s stock leverage, forex, or futures, the principle is the same. It involves borrowing funds from a broker to open a position larger than your actual capital, and the key point is that both profits and losses increase proportionally. In this article, I will explain how leverage works, how to calculate actual profit and loss, and the essential risk management rules to follow.

The Basics of Leverage: Applying the Lever Principle to Finance

In trading, leverage refers to trading with funds borrowed from a broker(. Just like a physical lever can move a heavy object with less force, leverage allows you to trade assets much larger than your own capital.

Let’s look at a concrete example.

Without leverage: 1 million won capital → trading size of 1 million won
With 10x leverage: 1 million won capital → trading size of 10 million won

In the latter case, you only have 1 million won of your own money, but you borrow 9 million won from the broker to trade assets worth 10 million won. This is the concept of leverage ratio.

How Profits and Losses Multiply Simultaneously

The core of leverage is that trading results are amplified by a multiple. Compare these scenarios:

Scenario 1: No leverage

• Capital: 1 million won
• Trading size: 1 million won
• Price rises by 1% → profit of 10,000 won
• Price drops by 1% → loss of 10,000 won

Scenario 2: 10x leverage

• Capital: 1 million won
• Trading size: 10 million won )Capital + Borrowed 9 million won(
• Price rises by 1% → profit of 100,000 won
• Price drops by 1% → loss of 100,000 won

As you can see, leverage amplifies both profits and losses by 10 times. This is why leverage is often called a double-edged sword.

Let’s consider an even more extreme example.

If you open a position of 20x leverage with 1 million won capital, totaling 20 million won in size:

• Price increases by 5% → profit of 1 million won )Same as capital(
• Price decreases by 5% → loss of 1 million won )Entire capital lost(

A mere 5% price fluctuation can wipe out your entire capital.

Margin and Margin Calls: Concepts You Must Know

To trade with leverage, you need to understand the concepts of margin).

Margin is the amount you must deposit as collateral to maintain your position. From the broker’s perspective, it guarantees that the trader can cover potential losses.

For example:

• Using 10x leverage, brokers typically require about 10% of the total position size as margin
• To open a 10 million won position with 1 million won capital, you need to lock in 1 million won as margin

Margin call occurs when the market moves against your position. As losses accumulate and your margin falls below the required level:

1. The broker demands additional margin deposit
2. If you fail to meet the margin call, your position is automatically liquidated
3. Any losses incurred are realized

Many beginners experience unexpected losses due to margin calls.

The Efficiency of Leverage Based on Position Size

The biggest advantage of leverage trading is capital efficiency.

With the same 1 million won capital:

• No leverage: can open only 1 position of 1 million won
• 10x leverage: can open 10 positions of 1 million won each

This allows for diversification across various assets. Assets that were difficult to buy due to high prices become accessible.

Additionally, for short-term trading(day trading), leverage is essential. In markets like forex with small daily fluctuations, using leverage of 100:1 or more is standard to achieve meaningful profits.

Leverage Trading vs. Non-Leverage Trading

To clearly distinguish the two methods:

Advantages of leverage trading:

• Higher potential returns (Profits can be high even with small price movements)
• High capital efficiency (Can open many positions with little capital)
• Easier portfolio diversification
• Useful for hedging risks

Disadvantages of leverage trading:

• Losses are amplified as well (Losses can exceed initial investment)
• Risk of margin calls
• High volatility risk
• Borrowing costs (Interest, swap fees)
• Psychological stress (Stress from large fluctuations)

Features of non-leverage trading:

• Losses cannot exceed the capital
• No margin calls
• Higher capital needed for high returns
• Suitable for long-term strategies
• Suitable for beginners

Summarized in a comparison table:

How to Determine if Leverage Trading Is Right for You

Before starting leverage trading, ask yourself:

1. Are you mentally prepared?

   • Are you ready to accept losses greater than your initial capital?
   • Can you handle stress from large fluctuations?
   • Are you willing to avoid emotional trading?

2. Do you have enough market experience?

   • Do you have basic market analysis skills?
   • Do you have short-term trading experience?
   • Do you understand and practice risk management principles?

3. Is your capital situation appropriate?

   • Do you have sufficient assets to absorb losses?
   • Are you not using living expenses or emergency funds for trading?

If any answer is “no,” I do not recommend leverage trading.

5 Key Rules for Practical Risk Management

Once you start leverage trading, these rules are essential:

1. Setting stop-loss is mandatory, not optional
Always predefine your stop-loss price when opening a position. This ensures:

• Automatic liquidation when the price hits the stop-loss level
• Prevents emotional decisions to hold losses
• You can limit maximum loss beforehand

2. Manage your position size strictly
General rules:

• Do not lose more than 2-5% of your total capital per trade
• Keep total position size within 50-100% of your capital

Example: With 1 million won capital, limit maximum loss per trade to 20,000-50,000 won

3. Diversify your portfolio to spread risk

• Invest in multiple assets
• Avoid all positions moving in the same direction at the same time
• Combine assets with low correlation

4. Use trailing stops to protect profits
When your position is profitable:

• Raise the stop-loss level as the price rises
• Prevents sudden reversals from eroding gains
• Secures realized profits

5. Avoid excessive leverage

• Beginners: use leverage of 2-3x or less
• Experienced traders: 5-10x
• In highly volatile markets: use even lower leverage

Leverage over 50x is avoided even by professionals because small fluctuations of 1-2% can wipe out your capital.

Financial Products Using Leverage

Stock leverage:
In developed markets, stocks are traded with margin accounts at 5-10x leverage. Similar structures are available in Korea.

Forex trading:
Forex markets have small daily fluctuations, making 50:1 or 100:1 leverage standard. High liquidity allows quick position closing.

CFD (Contracts for Difference):
Profit is generated solely from price movements without owning the underlying asset. Commonly used for short-term trading with leverage.

Futures:
Trade rights to buy or sell assets at a predetermined future price. With initial margin, large positions can be traded, naturally creating a leverage effect.

Options:
Trade the right to buy or sell assets. Small capital can control large positions.

Trading Journal: Habits of Growing Traders

One more thing to emphasize is the importance of maintaining a trading journal.

Every time you trade:

• Record why you opened and closed the position
• Analyze the causes of profits or losses
• Summarize lessons to avoid repeating the same mistakes

Regularly reviewing past trades helps you:

• Objectively see your trading patterns
• Discover emotional trading tendencies
• Gradually improve your trading skills

This is the biggest difference between beginners and experienced traders.

Final Summary: Approach Leverage Carefully

Leverage trading amplifies two things simultaneously: profits and losses.

Successful traders share these traits:

1. Know their risk tolerance precisely
2. Follow strict stop-loss rules
3. Avoid excessive leverage
4. Keep trading records and improve continuously
5. Always consider the worst-case scenario

Whether it’s stock leverage or forex, the principle is the same. Instead of dreaming of huge profits with small capital, focus on steadily growing your assets. That approach ultimately leads to greater long-term gains.