Leverage is a term used by many in business as well as a very widely used term in investments. Leverage can increase both returns and risk on an investment, especially as it pertains to forex. Forex investors use leverage to increase their position in foreign currency based on their account value. The lower the account value, the more leverage a typical investor is given to buy larger amounts of foreign currency and the greater the ability for that investor to take advantage of fluctuations within the currency market without a large balance in their account. The leverage afforded an investor or account holder within the forex market is one of the largest that can be obtained.
Often upon opening an account with an online broker, the leverage amounts to 50:1, 100:1 or as much as 200:1 depending on the broker and the size of the account balance. There are both mini-accounts and regular accounts, so the lot size of the trade can typically be either 10k or 100k respectively. We have found that leverage for a $50,000 account can be as high as 200:1, but if that account had 100k balance, that leverage would typically cap at 100:1 leverage.
The advantage of leverage is that if an investor want to trade a 100k lot (standard lot size) he would usually only need $1000 within his account to do so. The reason the leverage is so much higher than say the equities market (2:1) or the futures market (15:1) is due that fact that currency trading prices rarely fluctuate more than about 1% during intraday trading.
As with anything advantageous within the investment markets, there is always a downside to the upside. You can have your investment move in the opposite direction of what you thought it would do and leverage would then amplify your loss on that particular investment. There are ways to prevent large losses by using a stop or limit order in which your position closes if the losses begin to increase on a particular investment.
So leverage is the amount of money your broker is willing to let you borrow to invest in a position. With forex the money is borrowed from the online broker. The advantage with the forex market is that the investor has control of large amounts of currency that he can use to build a significant portfolio rather quickly. Again with leverage comes advantages, but also significant risk.