How markets work
Leverage
Also called Gearing
Using borrowed money to increase exposure beyond what your own capital would buy.
How it works
Leverage multiplies returns in both directions and adds a financing cost. It appears in many forms: margin loans, derivatives, leveraged funds, and debt inside the companies you own.
The key insight is that leverage changes the distribution of outcomes, not just their scale. It introduces the possibility of being forced out of a position before your view has a chance to be right.
Where it misleads people
Daily-rebalanced leveraged funds do not deliver their multiple over long periods. In a choppy market a 2× fund can lose money while the index it tracks is flat, because the multiple applies to each day, not the whole period.
Related terms
- MarginBorrowing from your broker to buy more than your cash allows, using your portfolio as collateral.
- Margin callA demand from your broker to add cash or sell holdings, because your account equity has fallen too low.
- Leveraged ETFA fund designed to deliver a multiple of an index’s return, reset every single day.
- Volatility dragThe way volatility reduces compounded returns below the simple average of the yearly returns.
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