What is Leverage?

Leverage is the use of borrowed money to obtain an investment. In all cases, you stand to lose more than you have invested.

You are leveraged when you borrow money to buy a house or a car or a futures contract or forex. Most people don't have enough money in their account to buy a house outright, so they put 10% down and borrow the rest. If things go bad, you can lose 10 times as much as you have invested, because you were leveraged 10:1.

In the stock market, you can trade at 2:1 leverage, which is considered very risky. You can buy twice as many shares as the money you have in your account. If you have a thousand dollars, you can borrow the rest on margin and purchase two thousand dollars worth of stock. Thus, in a one point move in the stock, you can make twice as much money than if you were not leveraged. Alternatively, if the stock goes down, you lose twice as fast. Stocks don't go to zero overnight, but sometimes they get cut in half quickly. If the stock price declines by half, you lose your entire investment, because you were leveraged 2:1.

Now, if being leveraged 2:1 is considered risky, what do you call 200:1 leverage? Insane. Your account value is going to swing incredibly with only small moves in your investment.