If you are a successful trader with a solid trading plan, leverage can absolutely make sense. As an example, without leverage, you may have $1,000 available to invest or trade. If your expected return on a given transaction is 15%, you stand to make a profit of $150 on your $1,000 investment.

With leverage, you can multiply your profits out. For example, if you borrow $10,000 to invest in that same transaction where you expect to earn a return of 15%, you would expect to make a profit of $1,500. You would need to repay the amount you borrowed plus some interest on the loan (which would come out of your $1,500). But at the end of the day, you would have a much larger profit than the $150 you had in the original example (without leverage).

So this sounds great, right? Sure, it does. But there's a downside. Leverage is great as long as your assumptions and expectations are right. If you are wrong and the transaction does not provide the expected results, you can end up owing a lot more than you originally anticipated. And when you are dealing with leverage, you can end up losing money that you do not have.

Without a solid, proven trading plan, using leverage is extremely risky and can lead to financial ruin. However, with a proven trading plan, solid research, and measured investing, one can use leverage to greatly increase their profits.

Michael M Thomas offers a free, 12-day Investing and Trading Success e-course on his website. Whether you are a new investor or trader looking to learn the ropes or whether you are a seasoned investor or trader looking to improve your results, this 12-day e-course is for you.