Jasmine Birtles
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What Is Leverage in Investing?
Ruby Layram
14th Jan 2026
Leverage is one of those investing terms that sounds complicated and a little scary at first. You might hear it described as a way to “supercharge” returns, but also as something that can lead to big losses.
So what actually is leverage in investing, how does it work, and when (if ever) should everyday investors use it?
Let’s take a look.
What Is Leverage?
Leverage means using borrowed money to increase the size of your investment.
Instead of investing only your own cash, leverage allows you to invest more than you actually have, by borrowing the difference from a broker or platform.
A simple example:
- You invest £1,000 of your own money
- You use leverage to borrow another £1,000
- Your total investment exposure becomes £2,000
If the investment rises by 10%, you make £200 instead of £100. But if it falls by 10%, you lose £200. Double the loss.
Leverage magnifies both gains and losses.
How Do Investors Use Leverage?
Leverage can be used in several different ways, depending on the investment product:
1. Margin Trading
You borrow money from a broker to invest in shares or funds, using your existing investments as security.
2. Leveraged ETFs
Some ETFs aim to deliver 2x or 3x the daily return of an index or asset. These are typically designed for short-term trading, not long-term investing.
Read: Short Term Trading vs Long Term Investing: What’s The Difference?
3. Derivatives (CFDs, spread betting, futures)
These products give exposure to price movements without owning the asset itself, often with built-in leverage.
4. Property Investing
Buy-to-let mortgages are a form of leverage, where you borrow most of the purchase price and invest a smaller deposit.
Leverage isn’t just a stock market concept, it exists across many asset classes.
Why Do Investors Use Leverage?
The main reason is simple: to amplify returns.
Leverage can:
- Increase potential profits
- Allow investors to access opportunities they couldn’t afford outright
- Make better use of capital (in theory)
For experienced investors with strong risk controls, leverage can be a strategic tool rather than a gamble.
The Pros of Investing With Leverage
Higher potential returns
Small price movements can generate larger gains.
Capital efficiency
You can keep some cash aside while still having market exposure.
Flexibility
Leverage can be used tactically for short-term opportunities or hedging.
The Cons (And Risks) of Leverage
This is where caution is essential.
Losses are magnified
Just as gains increase, losses increase too, and quickly.
You can lose more than you invest
In some cases, losses can exceed your original capital.
Emotional pressure
Leverage increases stress and can lead to panic decisions.
Costs add up
Interest, overnight fees, and funding charges can eat into returns.
Many beginner investors underestimate how quickly leveraged losses can spiral.
Is Leverage the Same as “High Risk”?
Not exactly, but it increases risk significantly.
An investment that might normally fluctuate gently can become extremely volatile when leverage is added. Even small daily movements can have outsized effects on your portfolio.
That’s why leverage is often described as a multiplier, not a strategy in itself.
When Might Leverage Be Used?
Leverage can make sense in specific situations, such as:
- Short-term trading by experienced investors
- Hedging an existing portfolio
- Property investing with long-term income plans
- Using small, controlled amounts within strict risk limits
It is not usually suitable for:
- Beginners
- Long-term buy-and-hold investing
- Anyone uncomfortable with rapid losses
A Final Word: Should You Use Leverage?
For most everyday investors, leverage is not essential for building wealth.
Long-term investing, diversification, and consistency tend to do the heavy lifting without borrowing money or increasing stress levels.
Leverage can be useful, but only when:
- You fully understand how it works
- You can afford the losses
- You have a clear plan and exit strategy
If you’re ever unsure, it’s usually better to invest without leverage and sleep better at night.
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