Understanding what leverage is and how it works is an essential part of investing basics. Here are a few things to consider about leverage in investments.

Leverage

Using leverage allows you to increase the amount of your position when purchasing securities. In order to do this, you are going to essentially borrow a certain amount of money so that you can invest it. The hope in using the strategy is that you will be able to amplify your returns by increasing the amount of money that you can invest.

Risk

Although this technique can improve your returns, it can also be very risky. While you are increasing your potential returns, you are also increasing your potential losses as well.

Example

Let's say that you had $5000 to invest in the stock market. You decide to purchase a stock that is five dollars per share. Instead of just using your own money, you borrow another $5000 from your broker to invest as well. Now you have $10,000 to purchase stock with and you can purchase 2000 shares. If the price of the stock increases to $10 per share, you are going to double your investment to a value of $20,000. When you pay back the broker, you are left with $15,000.

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