5.13What is leverage?
1What is it?
Leverage is using borrowed money or margin to increase your position size. 4× leverage means ₹1 of yours controls ₹4 of shares.
2Why does it exist?
It magnifies returns, but also losses, equally.
3Diagram
Stock +5% (no leverage)
5.0%
Stock +5% (4×)
20.0%
Stock −5% (4×)
-20.0%
4Calculation
Return on your money = Price change % × Leverage
- Stock rises 5% with 4× leverage → +20% on your money.
- Stock falls 5% with 4× leverage → −20% on your money.
- Stock falls 25% with 4× leverage → −100%: your money is gone.
Leverage cuts both ways.
5Quick revision
- Leverage multiplies gains and losses.
- High leverage can wipe out capital quickly.
6Knowledge check
Q1. 3× leverage, stock falls 10%. Your loss %?Show answer
30%.
Q2. With 5× leverage, what fall wipes you out?Show answer
20%.
Q3. Is leverage good or bad?Show answer
Neither; it’s a tool that magnifies outcomes and must be handled carefully.