Financial Leverage Trading Guide: A Double-Edged Sword for Amplifying Gains

In the stock market, many investors have heard of the term “leverage.” It seems capable of quickly amplifying profits, but it also hides significant risks. Margin trading, short selling, day trading, and other activities all fall under the category of leveraged trading. When the market develops as you expect, financial leverage can multiply your gains; however, if the market moves in the opposite direction, not only can profits evaporate, but your principal may also be lost forever.

What is leveraged trading?

Leverage trading essentially means “borrowing money to invest”—controlling larger assets with less margin to maximize returns with minimal capital. This principle originates from Archimedes’ lever law: “Give me a place to stand, and I will move the Earth.” In financial markets, the power of financial leverage is similarly significant.

For example: if you have NT$100,000 in capital and borrow NT$900,000 from a broker, your total investment is NT$1,000,000—this is 10x leverage. Common leverage tools include margin financing for stock purchases, or derivatives like futures, options, and contracts for difference (CFDs), all of which inherently carry leverage effects.

Robert Kiyosaki, author of Rich Dad Poor Dad, mentioned that the key to effectively using leverage is to generate a continuous cash flow from borrowed funds. For instance, a mortgage used for investment property can generate rental income, which exemplifies a proper understanding of financial leverage.

The difference between leverage and margin

Many people confuse leverage and margin. In fact:

Leverage refers to taking on debt, while margin is the collateral that investors must deposit to hold a position. They are related but fundamentally different.

Take Taiwan index futures as an example to illustrate leverage: Suppose the recent closing price of Taiwan index futures is 13,000 points, with each point worth NT$200. The total value of one futures contract is:

13,000 points × NT$200/point = NT$2,600,000

In futures trading, you don’t need to pay the full amount upfront—only a margin deposit. If the margin is NT$136,000, then the leverage multiple is:

NT$2,600,000 ÷ NT$136,000 ≈ 19.11x

This means you control NT$2,600,000 worth of assets with NT$136,000 in capital, using nearly 20x financial leverage.

The gains and risks of financial leverage

Bullish scenario: If the Taiwan index rises by 5%, the profit calculation is: (13,650 - 13,000) × NT$200/point = NT$130,000

With NT$136,000 in capital, you gain NT$130,000 profit, yielding a return of nearly 96%—this is the attractive aspect of leverage.

Bearish scenario: If the index drops by 5%, the loss calculation is: (13,000 - 12,350) × NT$200/point = NT$130,000

Your principal is almost entirely wiped out, risking total loss—this highlights the danger of leverage.

The higher the leverage multiple, the greater the potential gains and risks. Therefore, investors are advised to increase margin deposits appropriately, reduce leverage ratios, and set clear stop-loss points to strictly control losses.

Risks warning for leveraged trading

During market volatility, the most critical risk is “liquidation”—when investors cannot quickly replenish funds, brokers will forcibly close positions to prevent further losses.

A real case worth noting: In 2022, Korean YouTuber Satto conducted high-leverage Bitcoin futures trading during a live stream. He opened a 25x leveraged long position when BTC was at $41,666, betting on a rise. When Bitcoin fell below $40,000, he kept adding to his leveraged long positions, ultimately getting liquidated within hours with losses exceeding $10 million.

This case vividly demonstrates that regardless of the asset traded, abusing uncontrollable leverage and immature trading strategies are fatal errors. Young investors often hold the mindset of “win big if I succeed, and don’t add funds if liquidated,” but markets are ruthless. Investors must be fully prepared to handle market fluctuations and avoid over-leveraging and overconfidence.

Advantages and disadvantages of leveraged investing

Advantages

Enhances capital efficiency: Leverage allows small investors to make high-value investments with less capital, significantly reducing transaction costs.

Increases profit potential: Using leverage, one can trade products worth 10 times or even 100 times their capital; profits are multiplied accordingly.

Disadvantages

Significantly increases risk: The higher the leverage, the larger the position size, and the greater the probability of liquidation under similar conditions.

Magnifies losses: During losses, leverage amplifies the impact, leading to greater account depletion. Proper risk management and timely stop-loss are crucial.

Common leveraged investment tools

1. Futures

Futures are standardized contracts where both parties agree to buy or sell an asset at a predetermined price at a future date. Traded mainly on futures exchanges, common types include:

• Metal futures: Gold, silver, aluminum, etc.
• Index futures: Dow Jones, S&P 500, NASDAQ, Hang Seng Index, etc.
• Agricultural futures: Wheat, soybeans, cotton, etc.
• Energy futures: Oil, natural gas, crude oil, coal, etc.

Futures contracts specify the underlying asset, price, and expiration date. Traders can choose to close or roll over positions before expiry. Settlement is based on the “settlement price” in the spot market, which can lead to unpredictable settlement prices if the spot market experiences sharp fluctuations.

2. Options

Options (also called “call options” and “put options”) give the holder the right, but not the obligation, to buy or sell an asset at a fixed price within a specific period. Investors can choose to buy calls or puts based on market judgment.

3. Leveraged Exchange-Traded Funds (ETFs)

In the ETF market, terms like “leveraged ETFs,” “double long ETFs,” and “inverse ETFs” are common. These are leveraged funds suitable for active investors.

However, it’s important to note that leveraged ETFs perform magnified in trending markets but underperform during sideways or volatile markets. They are mainly used for short-term strategies. The most common criticism of leveraged ETFs is “high trading costs,” which are generally 10 to 15 times higher than those of futures trading; investors should evaluate carefully.

4. Contracts for Difference (CFDs)

CFDs are one of the most common trading modes on overseas broker platforms. They allow traders to conduct two-way trading (long and short) conveniently without holding the actual assets or engaging in complex margin financing, and they do not have settlement dates or rollover issues like futures.

CFDs are not standardized contracts; trading conditions vary across brokers, and the products are diverse. Using margin, traders can access a wide range of assets globally—stocks, precious metals, commodities, indices, forex, and cryptocurrencies.

Core recommendations for leveraged trading

Regardless of which leveraged trading tool you choose, the following principles are crucial:

• Start with low leverage: Never rush into high leverage; practice trading strategies with low ratios first.
• Set stop-loss points: Whether using 1x or 20x leverage, always predefine stop-loss levels to control maximum losses.
• Ensure sufficient capital: Using leverage means facing potential liquidation risk; adequate funds are necessary to handle market volatility.
• Prioritize risk management: Use financial leverage only when risk is well-controlled to genuinely increase returns.

Summary

Robert Kiyosaki believes that moderate use of leverage is a good way to increase returns, but the key is how to properly utilize borrowed funds to grow actual wealth. Once leverage is activated, both risks and rewards multiply—especially when leverage is applied to highly volatile products, which can lead to rapid liquidation.

Leverage itself is not inherently bad; the critical factors are understanding its nature, controlling risks, and acting within your means. If your financial leverage is used to boost returns and risk is well-managed, there is no reason it cannot be feasible. Remember: Always set stop-losses, and always start with low leverage.