Leverage
The use of borrowed capital to increase the size of a position relative to the money committed.
Formula
Leverage = Total Position Value / Own Capital Committed
Unit
ratio (x, times)
In depth
Leverage multiplies percentage outcomes in both directions, and its danger lies in the interaction with forced liquidation: an unleveraged investor can wait out a decline, while a leveraged one may be closed out before the recovery arrives. It also converts a temporary drawdown into a permanent loss, which is why time is the enemy of a leveraged position and the friend of an unleveraged one. The distinction from operating leverage matters: this is financial leverage from borrowing, while operating leverage comes from a business's fixed costs. Leverage does not change expected return per rupee of exposure; it changes only how much exposure a given capital carries and how survivable a bad outcome is.
Worked example
At five times leverage, a 10% favourable move returns 50% on capital and a 10% adverse move loses 50%. At 20% adverse the capital is gone, and the position would have needed only to survive to benefit from any later recovery.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Leverage” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.