Leverage is the ratio of a trader’s funds to the amount of the lot he is trading.
If a trader wants to make a transaction whose value exceeds the amount of his funds, then he applies for a loan to the exchange, other users of the platform, or to a third party. At the same time, his money acts as collateral. If the transaction is profitable, the trader takes all the profit, and the lenders receive only the amount of credit funds. If the transaction leads to a loss, then as soon as its amount becomes equal to the amount of the collateral, the trader’s funds go to his creditors, and the transaction is closed.
Traders resort to using leverage since a large number of assets allows them to conduct transactions with a higher profit.