Glossary Term

Leverage

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Just like the humble lever, which in physics allows you to multiply the amount of force that you can apply, in finance leverage is the use of borrowed capital to multiply your financial reach. Technically, any type of borrowing qualifies as leverage, however it’s typically used to refer to financial markets. Leverage is used by traders in order to take on larger positions than their balance would ordinarily allow. Using it increases the size of your potential gains, but also the size of your potential losses if the market goes against you. Essentially, more leverage equals more risk, so keep this in mind. When you hear an analyst on TV referring to this or that company as being highly- or over-leveraged, this simply means that the entity in question has a dangerous amount of debt in relation to its equity. In trading, leverage is presented as a ratio, informing you how many times the value of your equity you have available. So a leverage ratio of 1:10 means that you can trade a position that is 10x your account balance.

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