Glossary entry
Leverage increases economic exposure relative to the capital committed, through borrowing or derivative contracts. It magnifies the effect of price changes on the investor's equity. A ratio describes exposure compared with supporting capital, but actual outcomes also depend on financing, margin changes, and liquidation rules that may force action before an investment thesis develops.
Illustrative example
With exposure of 5,000 supported by 1,000 of equity, a 2% adverse price move produces a 100 loss before costs, or 10% of equity.
What to consider
Small market moves can cause large capital losses. Assess full exposure and margin requirements rather than judging risk by the deposit alone.
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