Leverage
Using borrowed money to increase exposure relative to your own capital.
What is Leverage?
Any technique that increases position size beyond your own capital - margin loans, options, futures, or leveraged funds. Leverage multiplies percentage returns in both directions and introduces the risk of forced liquidation before your thesis has time to play out.
Leverage: a worked example
3:1 leverage means a 10% adverse move wipes out 30% of your equity.
More terms in Positions & Trade Mechanics
Long Position
You own the asset and profit when its price rises.
Short Position (Short Selling)
You borrow shares, sell them, and profit if the price falls.
Margin
Borrowing from your broker to buy securities, using the account as collateral.
Cash Account
An account where every purchase is paid for in full, no borrowing.
Initial Margin (Reg T)
The equity you must put up to open a margin position - generally 50%.
Maintenance Margin
The minimum equity percentage you must keep in a margin account.
Margin Call
A demand to add cash or securities after equity falls below maintenance.
Short Squeeze
Rising prices force short sellers to buy back, pushing prices higher still.