Leverage
Leverage means investing with borrowed money: it multiplies every move the investment makes, up and down, and the loan still costs interest regardless of which way prices go.
How the multiplier works
At 2x leverage (half your own money, half borrowed, say), a 20% rise in the investment becomes about a 40% move on your own money. A 30% fall becomes about a 60% loss on what you put in. The borrowed share does not share the pain; you do.
What it looked like in real life
In March 2021 the family office Archegos Capital Management had built large, heavily borrowed positions through swaps with several banks. When the underlying stocks fell, the banks that had lent against those positions were forced to sell fast, and lost more than $10 billion between them.
The part that is easy to miss
Interest on the borrowed money is due whether the investment rises, falls, or goes nowhere. A flat year on the underlying asset is still a losing year once the loan's cost is taken off.
Where it shows up quietly
Leverage is not only an explicit loan: a mortgaged home, a margin account, or a leveraged ETF held for more than a day all multiply moves the same way, even when nobody calls it "borrowing to invest."
Key takeaways
- Leverage multiplies both gains and losses on your own money, not just the investment's own swings.
- The loan's interest is owed regardless of how the investment performs.
- Forced, fast selling under borrowed positions can turn a market move into a much larger loss, as it did at Archegos in 2021.