What is leverage? Margin and CFDs explained

Leverage means using borrowed money to make an investment bigger than the cash you put in. It works like a magnifying glass: gains get bigger, and so do losses.

A simple example

Say you have €1,000 and buy shares with it. If they rise 10%, you gain €100. If they fall 10%, you lose €100.

Now say you put in the same €1,000 but borrow another €4,000, so you hold €5,000 of shares. That is leverage of 5:1 (five times your own money).

Shares move	Change on €5,000	Effect on your €1,000
+10%	+€500	+50%
−10%	−€500	−50%
−20%	−€1,000	−100%: all your money is gone

And that is before interest on the loan and other costs, which are owed whatever happens. With 5:1 leverage, a 20% fall wipes you out. With 30:1, a fall of a little over 3% does.

Margin

Margin is the slice of your own money you must put down to hold a leveraged position. At 5:1, the margin is 20% of the position. If prices move against you and your margin shrinks, the provider asks you to add money (a margin call) or closes your position for you, locking in the loss.

CFDs in plain words

A CFD (contract for difference) is an agreement with a provider to exchange the difference in the price of something, such as a share, an index, a currency pair or gold, between the moment you open the contract and the moment you close it. You never own the underlying asset. You can bet on prices rising or falling.

CFDs are almost always traded with leverage, and they carry costs: the spread (the gap between buying and selling price) and, for positions held overnight, a daily financing charge. Because the provider sets the prices and is often on the other side of your trade, regulators class CFDs as complex, high-risk products.

EU protections for retail investors

In 2018 the European Securities and Markets Authority (ESMA) found that, depending on the country, 74% to 89% of retail CFD accounts typically lost money. It introduced temporary EU-wide restrictions. Since 2019 these have been applied through each country’s own rules; in Portugal, the market regulator CMVM adopted them in its Regulation 5/2019. For retail (non-professional) clients, the core protections are:

Leverage limits when opening a position:

Underlying	Maximum leverage
Major currency pairs	30:1
Other currency pairs, gold, major stock indices	20:1
Commodities other than gold, smaller stock indices	10:1
Individual shares and other assets	5:1
Cryptoassets	2:1

Margin close-out: the provider must close one or more positions once the money in your account falls to half of the margin needed to keep them open.

Negative balance protection: you cannot lose more than the money in your CFD account.

No incentives: providers may not offer bonuses or gifts to get you to trade.

A standard risk warning on websites, account documents and adverts, stating the percentage of that provider’s own retail accounts that lost money on CFDs. It is recalculated every three months over the previous 12. You will see it in a form such as: “X% of retail investor accounts lose money when trading CFDs with this provider.”

That percentage is one of the most useful numbers a beginner can read. It comes from the provider’s own clients, not from a marketing estimate.

Professional clients can opt out of some of these protections, but only if they meet strict conditions on experience, trading activity and wealth.

Leverage outside CFDs

Leverage turns up elsewhere too: margin accounts at brokers that lend against your shares, futures and options, some exchange-traded products that aim to deliver a multiple of an index’s daily move, and crypto platforms. A mortgage is also leverage: a small deposit controls a much larger property, which is why a fall in house prices can hit the owner’s equity hard.

The key idea

Leverage does not change how likely an investment is to rise or fall. It only changes how much each move costs or pays you, and adds borrowing costs on top. Risk and return explains the wider trade-off, and investment costs shows why small charges matter over time. Whether any leveraged product suits a particular person is a question for a regulated adviser.