Leverage will increase gains when things go right but will also increase losses when things go wrong. Mathematically speaking, it does not change the risk/reward ratio (or does it?). Since investing/trading is all about getting a favorable risk/reward ratio, why do traders use leverage?
closed as off-topic by chrisaycock♦ Oct 6 '13 at 15:38
This question appears to be off-topic. The users who voted to close gave this specific reason:
- "Basic financial questions are off-topic as they are assumed to be common knowledge for those studying or working in the field of quantitative finance." – chrisaycock
It is true that you don't change your risk/return ratio but you can scale the ingredients of this ratio, meaning that you can e.g. scale up the level of risk you are prepare to take to also lever up your returns. Through that mechanism you can make use of very small spreads.