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Glossary
Trading

Leverage

Using borrowed money to increase the size of your position.

Full guide, with a simulator
Leverage: how sensible people go broke

Leverage multiplies gains and losses equally, but the consequences are not symmetric. At 5x leverage, a 20% fall in the asset wipes out 100% of your money, while the asset itself is still worth four fifths of what it was.

It does not change your expected return. It changes the probability that you survive long enough to receive it.

Figure

Why the debt is the engine

Debt 70secured on the targetEquity 30+30%Debt 70, unchangedEquity 60, doubled

Put in 30, borrow 70, secure the loan against the company you are buying. A 30% rise in the business doubles your money. The same arithmetic works in reverse, which is why buyouts fail loudly.

Why it matters

It is the single most common cause of total, unrecoverable loss among otherwise competent investors.

The mistake everyone makes

Believing that being right about direction is enough. With leverage, you must also be right about timing.

Related terms

Margin call
Your broker demanding more money, at the worst possible moment.
Drawdown
The fall from a peak to the following trough. The pain, measured.
Debt to equity
How much of the business is funded by lenders rather than owners.

See Leverage on a real company

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