What is a major risk associated with leverage in trading?

Leverage in trading significantly amplifies both potential gains and potential losses. When a trader uses leverage, they are borrowing funds to increase their exposure to a particular asset, allowing them to control a larger position than their actual capital would allow. While this can lead to substantial profits if the market moves in their favor, it also means that if the market moves against them, their losses are similarly magnified.

For instance, if a trader uses a leverage of 10:1, a relatively small unfavorable price movement can result in losses that exceed the original investment. This high risk is particularly pronouncing in volatile markets where price fluctuations are common, leading to situations where traders could lose their entire invested capital or even owe additional money if the market moves sharply against their position.

In contrast, limited trading opportunities, lower transaction fees, and reduced market volatility do not inherently relate to the risks associated with leverage. These factors do not address the core issue of how leverage can increase risk exposure and the potential for substantial financial loss in trading activities. Therefore, the recognition of increased potential for significant losses accurately captures the major risk that traders face when utilizing leverage.