Leverage

What is Leverage? — Definition

Leverage means using debt (borrowed capital) to increase the size of an investment position beyond what your own capital would allow. If you invest $100,000 with 2:1 leverage, you control $200,000 in assets. A 10% gain becomes a 20% gain on your equity — but a 10% loss becomes a 20% loss, and a 50% decline wipes you out entirely.

Leverage is common in real estate, private equity, hedge funds, and options trading. It's also used at the corporate level — companies with high debt loads are said to be 'highly leveraged.' Excessive leverage was a major factor in the 2008 financial crisis: many banks were leveraged 30:1 or more, meaning a mere 3–4% decline in asset values made them insolvent.

Example

A homeowner who buys a $500,000 house with $100,000 down (5:1 leverage) gains 50% on equity if the house rises 10% to $550,000. But if the house falls 20% to $400,000, they've lost their entire $100,000 down payment — even though the house only fell 20%.

When evaluating stocks in BMInsider's 100X Insider Reports, leverage (measured by debt-to-equity or net debt/EBITDA) is always assessed — high leverage can amplify both earnings growth and crisis vulnerability.