Leverage
Leverage is using borrowed money to increase the size of an investment, which magnifies both gains and losses.
With 2× leverage, a 10% rise becomes about a 20% gain on your own money, and a 10% fall becomes about a 20% loss, before interest.
Formula
Leverage ratio = total position ÷ your own money
Related terms
- Margin: Buying on margin means borrowing money from your broker to buy more stock than your cash alone allows, using your investments as collateral.
- Margin call: A margin call is a demand from your broker to add cash or sell investments because your own stake in a margin account has fallen below the required minimum.
- Risk management: Risk management in trading is limiting how much you can lose, through position sizing, stop-losses, diversification and avoiding too much leverage.
Guides
Practise with $10,000 in play money
Free. No real money involved.
For learning only. This isn't financial advice.