GLOSSARY // Risk & Psychology
Leverage
Leverage is control of a position larger than the cash behind it, using borrowed money or derivatives, so that gains and losses are computed on the full position size rather than the equity. A 2:1 levered account moves twice as fast as the underlying stock, in both directions.
In US equities the standard limits are 2:1 overnight buying power under Reg T and 4:1 intraday for margin accounts flagged as pattern day traders. Options and futures embed far higher effective leverage. Leverage does not change a strategy's edge — it multiplies the outcome of whatever edge, or lack of one, already exists, and it adds borrowing costs and forced-liquidation risk on top.
With $10,000 cash at 2:1, a trader buys $20,000 of stock. A 10% gain in the stock makes $2,000, a 20% return on equity. A 10% drop costs $2,000, a 20% loss — and a 30% drop wipes out $6,000, or 60% of the equity, before margin interest at 8-12% annually is even counted.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.