Leverage

Investing with borrowed money so that you control more of an asset than your own capital would buy. Gains and losses are both multiplied by the same factor.

Example

$10,000 of your own plus $10,000 borrowed buys $20,000 of an asset. A 25% fall leaves $15,000 against a $10,000 debt - your capital has halved.

Important

Leverage changes who decides when you sell. A large enough fall lets the lender act, which converts a temporary decline into a realised loss at a moment you did not choose.

Related terms

• Margin call — A demand from a lender for more cash or collateral because the value of a leveraged position has fallen far enough that the equity in it is below the required level.
• Maintenance margin — The minimum share of a leveraged position's current value that must be your own equity rather than borrowed money, before the lender can demand more or close the position.
• Forced selling — Selling because you have to rather than because you chose to - triggered by a lender, a redemption request, or an unrelated need for cash.

Lessons that explain it

• A physical good, and three very different ways to own it — Metal in a vault, a listed product that holds metal, and a dated contract on metal are not three versions of one investment. They differ in minimum size, cost, storage and who owes you what. (9 min)
• A contract about a price, not a piece of anything — An option or future is an agreement whose value depends on another asset. You own a right or an obligation with an expiry date, not a share of a business. (10 min)
• Big percentages on a small bet, and most bets expire worthless — Option payoffs are lopsided: a bought option can multiply its premium or lose all of it, and the price usually has to move a long way just to break even. (12 min)
• Unlimited loss on the short side, spreads on every trade, and tax rules that vary by contract — Derivatives add risks shares do not have - assignment, margin calls, unlimited short losses - plus higher trading costs and tax treatment that differs by product and country. (13 min)
• Every currency trade is a bet on two countries at once — A forex position is always one currency against another. Retail traders usually hold it through leveraged broker products, while every international investor already holds currency risk without trading at all. (9 min)
• Price moves, interest differences and leverage - in a market where one side's gain is the other's loss — Forex returns come from exchange-rate moves and interest-rate differences, magnified by leverage, in a market that is roughly zero-sum before costs and negative-sum after them. (12 min)

All 578 terms in the Investing glossary