Leverage
Leverage is the use of borrowed money or derivatives to control a larger investment position than your own capital alone would allow, magnifying both gains and losses.
Investors can gain leverage by borrowing from a broker through a margin account, by using derivatives such as options and futures, or by buying leveraged ETFs. Companies use leverage too, by financing operations with debt.
Leverage is often expressed as a ratio. With 2:1 leverage, $10,000 of your own money controls a $20,000 position. A 10% gain on the position becomes a 20% gain on your capital; a 10% loss becomes a 20% loss.
The risks go beyond larger losses. Borrowed money carries interest, and if a leveraged position falls far enough, a broker can issue a margin call demanding more cash or can sell holdings at unfavorable prices. With some instruments, losses can exceed the amount originally invested.
Under Federal Reserve Regulation T, investors can generally borrow up to 50% of the purchase price of eligible stocks, and FINRA rules require minimum equity to be maintained. Leverage tends to amplify the effects of volatility and drawdowns.