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Leverage

Market Mechanics

Leverage is using borrowed money or derivatives to hold a position larger than your own capital.

It magnifies gains and losses alike: with 2x leverage, a 10% price move becomes roughly a 20% move on your own money, and the interest on the loan is an extra cost. Applied to companies, it describes how much of the business is financed with debt.

Example

You put in $10,000, borrow another $10,000 and buy $20,000 of stock. If the stock falls 25%, the position is worth $15,000, the loan is still $10,000, and your stake has halved to $5,000.

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More in the Guide

What Is Leverage — and Why You Should Stay AwayCarrying a position on borrowed money. It multiplies gains and losses alike — but what it really takes is your right to decide when to sell.