Trading
Leverage
Leverage lets an investor control a larger position than their own capital would allow, by borrowing the rest. If the trade moves in their favor, gains are amplified relative to the cash they put up.
The danger is symmetric. Losses are magnified just as gains are, and a leveraged position can be wiped out by a move that a cash position would easily survive. Margin calls can force sales at the worst possible time.
Leverage appears throughout markets, from margin accounts to derivatives to the balance sheets of companies. Used carefully it boosts returns; used recklessly it is a leading cause of blowups.
Example
Using 2-to-1 leverage, a 10% rise in a stock doubles to a 20% gain on your own capital, but a 10% fall doubles the loss.
Leverage — FAQ
What is Leverage?
Leverage is the use of borrowed money or financial instruments to increase the potential return of an investment, which also magnifies potential losses.
Can you give an example of Leverage?
Using 2-to-1 leverage, a 10% rise in a stock doubles to a 20% gain on your own capital, but a 10% fall doubles the loss.
Understanding creates conviction.
Yield Theory turns concepts like this into a monthly read on where capital is heading — and what to do about it. Founding price $24.99/mo.
$24.99/mo · cancel anytime · researched by humans