Leverage

Leverage is using borrowed money or derivatives to control a larger position than your capital alone.

In the real market

A 2x leveraged S&P 500 ETF promises double the index’s daily return. In a year when the index rises 20%, the leveraged ETF might return only 30%, not 40% — because daily rebalancing and volatility drag eat into returns. In a sideways year with big swings, the leveraged ETF can lose money while the index goes nowhere. Leverage in a straight line looks like free multiplication; in the real, choppy market it is a silent eroder. This is the scenario that surprises most leveraged-ETF buyers.

Using it in practice

Use leverage only with money you can lose and positions sized so the worst case is survivable. For long-term investing, leverage adds return but mostly adds risk of ruin, and history is unkind to the leveraged.

Where people go wrong

It turns small adverse moves into large losses; survival depends on sizing.

Why investors care

It multiplies outcomes, good and bad, from the same move.

Example in numbers

Key takeaway

Leverage multiplies outcomes in both directions, and the compounding drag of leveraged products means long-term returns often disappoint even when the direction is right. A 3x position loses 30% on a 10% market drop, and leveraged ETFs decay in sideways markets. Use leverage only with money you can lose, for short horizons, and sized so the worst case is survivable. For long-term savings, leverage adds more risk of ruin than it adds return.

Definitions reviewed by the Investing Glossary editorial team.