Using borrowed money to increase potential returns, amplifying both gains and losses.
Leverage is the use of borrowed money to finance investments, amplifying both potential gains and losses. In real estate, a mortgage is leverage—you control a $300,000 property with a $60,000 down payment, using $240,000 borrowed. If the property appreciates 10%, you gain 50% on your invested capital. However, if it depreciates 10%, you lose 50%. In investing, leverage via margin accounts lets traders buy more securities than their cash allows, amplifying returns but also losses and triggering margin calls if losses exceed collateral. Leverage is powerful but dangerous—it can turn small gains into substantial profits but also turn small losses into devastating ones. Leverage increases financial risk significantly and should be used cautiously and only by experienced investors who understand the risks.