The use of borrowed funds or financial instruments to increase the potential return on an investment. It involves employing debt or other financial instruments to amplify the exposure to an asset or investment, with the expectation that the returns generated will be greater than the cost of borrowing. This can enable investors to control a larger position with a smaller amount of their own capital, magnifying both potential gains and losses.
There are various forms of leverage, including:
Margin trading: Investors borrow money from a broker to buy more shares or assets than they could afford with their own capital.
Leveraged ETFs or funds: These investment products use financial derivatives and debt to amplify the returns of an underlying index or asset.
Options and futures contracts: These financial instruments allow investors to gain exposure to a large amount of an asset with a relatively small upfront investment.