For instance, EUR/USD the exchange rate is 1.2505/1.2509 & your leverage is 1:100. You believe EUR/USD will shoot up & buy 0.1 lot of EUR/USD at 1.2509 (Ask price). So, you buy 10,000 EUR and sell 10,000*1.2509=12,509 USD. In fact to fund this position you do not have to have 12,509 USD but only 125.09 USD. The rest of the money is leveraged to you by the service provider.
Leverage (or gearing) mechanism allows you to open and hold a position much larger than your trading account value. 1:100 leverage means that when you wish to open a new position, then you need to support a deposit 100 times less than the value of the contract you are interested in.
For example, you believe that EUR/USD is moving higher and buy 10,000 EUR and sell 12,509 USD. Assuming you are right and EUR/USD goes up to 1.2599/1.2603 and you decide to close the position: when you close a long position you sell the base currency (10,000 EUR in our example) and buy the quote currency (10,000*1.2599 = 12,599 USD):
To fund this position you only need 100 EUR (approximately 125 USD) not 10,000 EUR. The profit on this position is 90 pips (1.2599-1.2509=0.0090). A pip or point is a minimal rate fluctuation. For EUR/USD 1 pip is 0.0001 of the price (see Table 2).
This example shows a favourable outcome. If EUR/USD had fallen you would realise a loss not a profit and with leverage this loss will be magnified. For example, if you close the position at 1.2419, your loss would be $90.