In Leveraging we use various financial instruments and/or borrowed capital, such as margin, to increase the potential return of our investments.
A good example of Leverage is in real estate through the use of mortgages to purchase an i.e. home.
Leverage can also be used with options, futures, margin and other financial instruments.
For example, say you have $10,000 to invest. This amount could be invested in 100 shares of a company’s stock, but in order to increase Leverage, you could invest the $10,000 in 10 options contracts.
You would then control 1,000 shares instead of just 100.
Leverage helps the investor in using larger amounts of money. However, it comes with much greater risk.
If an investor uses Leverage to make an investment and the investment moves against him, the loss will be much greater than it would’ve been if the investment had not been Leveraged!
On the other hand, it can also magnify any potential gains!