Leverage is the ability to make big trades with only a small amount of actual capital in your account. Most of brokers offer leverage as more you trader more they will make money. Most traders do not have big capital to start trading and they use leverage to take trades without understanding how it works and blow off their account.
Leverage is the ability to make large trades in the market with only a small amount of actual capital in your account. Forex brokers offer leverage as a way to make the market accessible to the average investor. Most traders do not have 10k to get started with forex trading. If a forex brokerage provided a trader with the leverage of $200 to every $1 deposited (200:1 leverage), it would only take a deposit of $50 to open and control a 10k trade.
Leverage can be a sharp double-edged sword. It can work for you, or against you. If you make a trade with a mini trading lot of 10k, each pip would be worth around $1. If you gain 5 pips, everything is great, you used $50 and made a 10% return. If you lose 5 pips, you have a 10% loss just as fast.
While it is really nice to think about the money you can make, the money that can be lost is rarely discussed. Leverage can be very dangerous if used improperly. Brokers can offer heavy leverage, but that does not mean that you are forced to use it all the time. Many traders often use less than 5 times leverage. While the possible gains are smaller, so are the possible drawdowns.
Leverage is commonly believed to be high risk because it supposedly magnifies the potential profit or loss that a trade can make (e.g. a trade that can be entered using $1,000 of trading capital, but has the potential to lose $10,000 of trading capital). This is based upon the theory that if a trader has $1,000 of trading capital, they should not be able to lose more than $1,000, and therefore should only be able to trade $1,000 (e.g. by buying one hundred shares of stock at $10 per share). Leverage would allow the same $1,000 of trading capital to trade perhaps $4,000 worth of stock (e.g. by buying four hundred shares of stock at $10 per share), which would all be at risk.
While this is theoretically correct, it is the way that an amateur trader looks at leverage, and is therefore the wrong way.