Leverage

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: Leverage is the use of borrowed money, or of instruments such as options and futures, to control a position larger than the investor's own capital, which magnifies both potential gains and potential losses.

How leverage works

Leverage links the size of an exposure to the capital committed. If you control $20,000 of stock with $10,000 of your own money, you have 2:1 leverage, and every 1% move in the stock moves your equity by about 2%. The extra exposure can come from:

  • Margin borrowing: a broker lends part of the purchase price, using your securities as collateral.
  • Derivatives: an option or a futures contract controls a large notional amount for a small premium or deposit.
  • Leveraged funds: some ETFs use derivatives to seek a multiple of an index's daily return.

Companies use leverage too, by financing operations with debt. A firm with high debt relative to equity has more financial leverage, which raises returns to shareholders in good times and increases bankruptcy risk in bad times.

Example of leverage

Suppose an investor has $10,000 and buys $20,000 of a stock at $50 per share (400 shares), borrowing $10,000 on margin.

  • If the stock rises 10% to $55, the position is worth $22,000. After repaying $10,000, equity is $12,000, a 20% gain before interest.
  • If the stock falls 10% to $45, the position is worth $18,000 and equity drops to $8,000, a 20% loss.
  • If it falls 30% to $35, equity shrinks to $4,000, a 60% loss, and the account would likely receive a margin call well before that point.

Margin interest adds a cost that must be overcome even if the price stays flat.

Risks of leverage

Leverage does not change the odds of a trade being right; it changes the consequences. Losses accumulate faster, forced liquidations can lock in losses at the worst time, and in futures or short positions, losses can exceed the original deposit. Higher volatility makes leveraged positions more fragile because normal price swings can trigger margin calls. Leveraged ETFs also experience compounding effects that can cause returns over longer periods to differ substantially from the stated multiple. For example, if an index rises 10% one day and falls 10% the next, it ends down 1%, while a fund seeking twice the daily return would rise 20% and then fall 20%, ending down 4%. In choppy markets this decay can erode value even when the index finishes roughly where it started.

How traders manage leverage

Disciplined traders size positions so that a reasonable adverse move cannot wipe out the account, keep cash buffers above maintenance requirements, use stop orders, and avoid stacking leverage on leverage, such as buying leveraged ETFs on margin. Lenders limit leverage by applying a haircut to collateral, and regulators set minimum margin requirements.

Frequently asked questions

Is leverage good or bad?

It is a tool. It can improve returns on capital when used carefully, but it magnifies losses equally and can lead to forced selling.

What does 2:1 leverage mean?

It means the position is twice the size of the investor's own capital, so each 1% price move changes the investor's equity by about 2%.

Can you lose more than you invest with leverage?

With margin accounts, futures, and short positions, losses can exceed the initial capital, and the investor owes the difference.

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For information only, not investment advice. See the disclaimer.