Assume that the share price of company XYZ recovers after great earnings, rising to $2.60, and you decide to exit your position.
You would have earned a total of $100 by trading stocks and CFDs (2.60 - 2.50 * $1,000). The return on your CFD, on the other hand, would be 20%, compared to only 4% on your investment.
Why? Because you deposited $500 to open the CFD trade.

Leverage amplifies both profits and losses in trading by allowing traders to control larger positions with a smaller amount of capital. For example, with 10:1 leverage, a 1% market move results in a 10% gain or loss on the invested amount. While this can significantly increase potential returns, it also raises risk exposure. A small unfavourable price movement can lead to substantial losses, sometimes exceeding the initial investment. Traders must use leverage cautiously, implementing strict risk management strategies like stop-loss orders to limit downside. Over-leveraging can wipe out an account quickly, especially in volatile markets. Therefore, while leverage can enhance profits when used wisely, it demands discipline, proper position sizing, and an understanding of market dynamics to avoid catastrophic losses.