What is leverage in investing?

Leverage: Investing with borrowed money. Gains and losses get bigger, and you can lose more than you put in.

With leverage you invest a bigger amount than you own. You borrow the difference, for example from a broker. Your gains and losses grow in proportion.

Leveraged products often show this with a number, such as 5x. A 1 percent move in the price then becomes about 5 percent on your own money.

You usually pay interest on borrowed money. And in a fall your position can be closed automatically, which locks in your loss.

Example
You have 1,000 euros and borrow 4,000 euros, so you invest 5,000 euros. If the price rises 10 percent, you gain 500 euros, which is 50 percent on your own money. If the price falls 20 percent, you lose 1,000 euros and your whole stake is gone. Interest and costs are left out here.

Watch out
With leverage a small fall in price can cost your whole stake, and sometimes more. For leveraged products such as CFDs, the required risk warnings say most retail investors lose money.

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