Leverage
Definition
Using borrowed money to invest or purchase. Leverage amplifies returns but also losses. A mortgage is leverage (borrow to buy house). Margin trading is leverage (borrow to buy stocks). Leverage is powerful but dangerous.
Why It Matters
Leverage can turn a 20% investment loss into 40% or more. 2008 financial crisis showed leverage danger — people lost homes using 2:1 or worse leverage. A mortgage at 4:1 leverage is reasonable. 10:1 margin trading is reckless.
Example
Buy $100k house with $20k down (5:1 leverage). House appreciates 10% equals $110k. Your equity gained 50% (gain of $10k on $20k equity). But if house depreciates 10% equals $90k. You've lost 50% of equity. Leverage cuts both ways.