This article is for educational purposes only. Trading with leverage, margin, futures, or derivatives carries a high risk of rapid or total loss. This is not financial advice and should not be used to make trading decisions.
Why Do Brokers Offer Leverage To Retail Investors?
Why do brokers offer leverage to retail traders, how do they profit from it, and what does that actually mean for you as a trader?
It is not generosity. Leverage increases trade size, which means more spreads or fees for the broker and, for experienced traders who know how to control risk, the possibility of stronger results and much faster losses. The relationship cuts both ways.
On Leverage.Trading, we break down how brokers make money on leverage so traders can understand the business model behind the platforms they use.
From forex and CFD providers to crypto derivatives exchanges, the pattern is the same: bigger trades mean more broker revenue. With strict risk management and realistic position sizing, leverage can function more like a controlled tool than a random blunt weapon, but it will always magnify both mistakes and good decisions.
From forex and CFD providers to crypto derivatives exchanges, the pattern is the same: bigger trades mean more broker revenue. But with proper risk controls and position sizing, that same leverage can be turned into a precision tool rather than a blunt weapon.
The 4 main reasons why brokers provide leverage
If you are reading this article, you probably understand that brokers give leverage to traders to make money. While that is true there are two other subtle reasons that you probably haven’t thought about that are very relevant to most traders.
I want to walk through the main reasons why brokers offer leverage to retail and more experienced traders, and some of the tactics they use to attract those traders. In the end, the more active clients a platform has, the more revenue it generates.
The second and third reasons can be useful for some traders in specific situations, but they also come with structural risks that are easy to underestimate.
These reasons usually go unnoticed and most negative comments are generally about trading platforms ripping off new traders through high leverage.
However, if you understand your edge, size your risk correctly, and respect your limits, leverage can help you express that edge more efficiently. If you do not, it will usually accelerate your losses.
In fact, without the added buying power and the way that these platforms are structured, you would probably not be able to trade some of the most famous currency pairs such as EUR/USD or GBP/JPY.
The same goes for all the American stocks that are offered by leveraged CFD platforms which are not available through regular stock exchanges.
1. To make more money
The goal of any financial institution is always to earn revenue and make money. Without this objective, there would be no reason to start a business in the first place.
In the case of a leveraged broker, there are two primary ways they make money which I have listed below:
- Trade fees and commissions – Now, while a standard stock exchange also makes its money from trade commissions and trade fees, leveraged platforms use this revenue source to the max. For example, if you buy a stock on a regular exchange for $500, the exchange will make around $0.50 of profit. If you use the same amount of starting capital and use 1:50 leverage to buy the same stock on a CFD platform the broker will make $25. The reason for this is because your position size is 50 times bigger and therefore the fee you pay is 50 times more. This is extremely the main source of income for a leveraged broker.
- Overnight management fee – An overnight fee or a management fee is the second revenue source and this is a fee that is charged every night around midnight. This fee is an interest payment that you are obligated to pay to the platform for using the borrowed capital in your open position. The overnight fee only applies to positions that are held overnight. It is the same interest payment that you would pay for taking out a loan to buy a house or a car with the exception that this is a smaller amount and it is charged daily. Once you close out your position this fee stops.
2. To offer more markets
This holds for CFD platforms that offer leveraged contracts that mirror the price of the underlying asset. When you buy a stock on a CFD exchange you are not buying the underlying security, but instead, you buy the contract that the platform created.
By creating contracts that reflect the true price of a stock, CFD platforms can offer hundreds and even thousands of different exotic markets such as:
The list goes on and on. I could probably write 10 articles about the different markets offered by these platforms.
The contract mirrors the price of the real stock or the real value of the commodity with very good precision and it is not affected by liquidity issues as some ticker names experience during a year.
This setup is attractive for traders who want access to many markets from a single account. You can route orders into forex, indices, stocks, and crypto contracts without opening ten different accounts.
Without this advantage, there would be less activity in the order books, and the companies being these platforms would miss out on a lot of revenue.
The flip side is that it becomes very easy to overtrade markets you barely know. When you explore new instruments, treat them as test environments and assume you are missing important details about how they move and how fees work.
3. To offer short-selling
If you are not already familiar with the concept of short-selling in a leveraged market I recommend that you read this article.
Short-selling is not traditionally an option on regular stock exchanges. However, through leveraged platforms, short-selling is a common practice.
With leveraged contracts you can borrow exposure, sell into the market, and later buy back if the price falls. On a chart it looks simple. In practice, short selling is technically and mentally difficult, and a mistimed entry can move against you much faster than you expect.
I will say that this style of trading is not for everyone and you need to be very comfortable about how to enter a negative market.
Many traders attempt to short-sell forex, crypto, or even stocks but fail miserably.
In strong sell-offs a well timed short can offset some of your long exposure, but you should treat this as an advanced tactic. Most traders lose money trying to short every top instead of focusing on clear trend and risk conditions.
However, it is an advantage to take notice of because the profits earned from a properly executed short position can outweigh your standard trades.
This is because when the market falls it triggers a domino effect and a negative feedback loop where traders get scared and sell their contracts only to trigger more fear in other traders and the cycle repeats.
A leveraged broker gives you the tools to trade both directions. That does not mean you should be trading both directions all the time.
What is broker margin?
There are several types of platforms that offer increased buying power through borrowed funds and they all use the same system for lending out this capital to their traders.
Behind every broker, there is a liquidity provider (a large bank) that supplies capital to the traders of each broker. These liquidity providers are large financial institutions with bottomless pockets of cash that take the other side of most trades that you make on any platform.
The broker itself doesn’t take the other side of your trade, it only supplies the contract and the charting interface where you do all your active day trading. The actual capital that goes into the market comes directly from third-party institutions.
The process looks like this:
- A trader deposits money in the account as collateral.
- The trader chooses a market to trade.
- Selects the position size or lot size.
- Enters the market either short or long with his capital + the leverage capital.
- The leveraged capital enters the market together with your capital.
- The profit or loss is calculated on the total position size.
- When the trader closes out the position the margin capital is returned to the account.
- The leveraged capital is funneled back to the liquidity provider’s open bank account.
- The profit or loss is calculated and added or withdrawn from your margin capital.
Keep in mind that with some platforms you can change the amount of margin you use and how much buying power you want to use for each trade. This way you can actively control your risk and plan your trades.
Use our leverage calculator to see your margin requirement while trading your market.
All the common risks associated with leveraged brokers
As always, there are no rewards without risks so let’s run through the most prominent risk factors that these operators will add to your portfolio and overall strategy.
Below is a list of the most common risk of using leverage:
- Larger losses – To me, this is the biggest threat of them all and if you are not careful you can end up losing all your money in a matter of minutes simply by making one wrong decision without a stop-loss order. If you buy with a high ratio and the price drops immediately after you have entered you can suffer very large losses very quickly.
- Increased fees – If you leverage your position 30 times your fees will be 30 times bigger as well. This is something that most traders don’t know and they can spend several hundred dollars in one single day of trading without knowing it. Later when they check their trade history they see that each trade they made cost around $15 due to the high leverage used.
- Margin call – A margin call is a warning sign that you receive from your operator due to very large losses. This warning signal tells you that you are running out of cash and that you are in big trouble. If you ignore this warning sign you could end up with a liquidated account.
- Liquidation – Liquidation is a total loss of all trading capital due to large losses.
- Difficult to understand – Compared to regular spot trading, using leverage can be difficult to learn and understand. This is because you need to control several other factors such as your margin capital percentage, liquidation price, and knowing how to calculate your leverage. Read our guide on spot trading vs leverage.trading to learn more about the differences.
- Overtrading – Greed often strikes new traders when they use a leveraged broker for the first time and this can lead to overtrading. Overtrading is irrational and usually results in unwanted losses.
Final words
This article explains the main reasons why brokers offer leverage to retail investors and what that means for you when you choose a platform. The primary goal on their side is to grow commission and fee revenue. The additional reasons, like broader market access and flexible position sizing, can be useful if you handle them with respect.
Risk always scales with position size.
If you are able to stay away from overleveraging, define your downside before each trade, and only apply leverage to strategies you truly understand, a leveraged broker can be a practical tool. If you treat it as a shortcut to higher income, it will almost always end the same way: a faster exit from the market.
Anton Palovaara
This article is published under Leverage.Trading’s Risk-First Education Framework, an independent learning system built to help traders quantify and manage risk before trading.