Example Leverage

Suppose that the FTSE is now at 5000, the margin is 1%, i.e. to open a position you would need to deposit £50. This gives you a leverage of 100:1, meaning that your position has a total value 100 times larger than your initial outlay.

Should the market move by 1% to 5050, you would have made a profit of 100 % (by investing 50 you gain 50).

This may also work the opposite way. If the market moves down by 1%, to 4950, you lose 100% of your initial capital. i.e. 100% of your investment.

The application of leverage magnifies the price movements in the markets. It can magnify both the profits as well as losses. The losses can exceed your initial outlay.