What it is
Investors use leverage to control a larger amount of assets than their own capital would normally allow. This is typically done by borrowing money, for example, through margin loans from a brokerage. If the investment performs well, the returns on the borrowed capital amplify the investor's gains. However, if the investment declines, the losses are also magnified, potentially exceeding the initial investment.
Leverage is a recurring theme in discussions about risk, speculation, and market stability. News often covers rising margin debt as a potential warning sign for market corrections, or how hedge funds use leverage in their strategies. Regulatory bodies monitor leverage levels to prevent systemic risk. Understanding leverage is crucial for comprehending speculative trading, margin calls, and the potential for rapid wealth destruction or creation.
Why it matters
Leverage can magnify investment returns but also significantly amplify losses, making it a high-risk tool that requires careful consideration.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice