Leverage
Using borrowed capital to increase the potential return of an investment.
Definition
Leverage is the use of borrowed funds or financial instruments to amplify potential returns (and losses) on an investment. In trading, leverage is expressed as a ratio — 50:1 leverage means you can control $50,000 worth of assets with just $1,000 of your own capital. While leverage magnifies profits, it equally magnifies losses. A 2% adverse price move with 50:1 leverage results in a 100% loss of your margin. US regulations limit forex leverage to 50:1 for major pairs. Leverage is also used in corporate finance when companies use debt to finance operations, measured by the debt-to-equity ratio.
Related Tools
Related Terms
Margin
The collateral required to open and maintain a leveraged trading position.
TradingMargin Call
A broker's demand for additional funds when account equity falls below the required minimum.
TradingRisk Management
The process of identifying, assessing, and controlling threats to an investment portfolio.