Leverage is the use of borrowed funds to amplify the potential return of an investment. It allows traders and investors to control a larger position with a smaller amount of capital, increasing the potential profit (or loss) from a given trade.
Leverage is typically expressed as a ratio of borrowed funds to the trader's capital. To calculate the leverage ratio, divide the total value of the position by the amount of capital that the trader is required to put up for that position. The result is the leverage ratio. For example, if you can trade a $500,000 position with a $1,000 deposit, the leverage ratio is 500:1.