Definition
Leverage is the use of borrowed money or derivative contracts to hold market exposure larger than the capital you put up, which magnifies both gains and losses relative to that capital.
How it works
Leverage is often stated as position value divided by your own capital, so 5x means HK$5 of exposure per HK$1 of capital. It can come from margin loans, futures, options or corporate borrowing. Before costs, the percentage gain or loss on your capital is roughly the leverage multiple times the asset's percentage move.
Because losses scale the same way, a modest adverse move can eliminate all the capital: at 5x, a 20% fall does it, and at 10x a 10% fall. Interest, margin calls and forced selling can turn a temporary decline into a permanent loss. Leverage does not create returns; it changes risk.
Formula / convention
Leverage ratio = Position value ÷ Own capital; Return on own capital ≈ Leverage × Asset return − (Leverage − 1) × Borrowing rate (for borrowed-money leverage)
Illustrative example
A fictional investor puts up HK$100,000 of capital and buys HK$500,000 of assets, 5x leverage, with HK$400,000 borrowed. A 4% rise gains 4% × 500,000 = HK$20,000, or 20% on the capital, while a 4% fall loses the same HK$20,000. A 20% fall, HK$100,000, would erase the capital before interest and fees.
What to watch for
Leverage magnifies losses as much as gains, adds financing costs and can force liquidation at the worst moment; in some products losses can exceed the capital you put up.