How does leverage function in commodity trading?

In commodity trading, leverage is a crucial concept that allows traders to control larger positions than they could by using only their own capital. By using leverage, traders provide a small percentage of the total trade value as margin, and in return, they can control a more substantial amount of the asset. This means that with a relatively modest investment, they can manage large commodity contracts, which can significantly amplify both potential gains and losses.

For instance, if a trader has $1,000 and is able to leverage it 10 to 1, they could control a position worth $10,000 in commodities. This affords the trader the opportunity to capitalize on market movements that may yield substantial returns compared to what they would achieve if they were trading without leverage. However, it also comes with higher risk, as losses can exceed the initial investment.

The other options do not accurately describe the primary function of leverage in commodity trading. While leverage does limit the amount of capital required to start trading, its most pertinent feature is that it enables the control of larger positions. Moreover, leverage does not prevent potential losses; in fact, it can exacerbate them. Lastly, standardizing contract sizes pertains to the structure of the trading market itself but is not directly related to the concept