Leverage is the ratio of the amount of the investment you control to the amount of money you need to control it. Buying the investment outright is 1x leverage.
Wise use of leverage is probably required for a good return. I talked about this a bit in How to Lose a Fair Game.
Leveraging up means you are increasing the ratio, which usually means you are borrowing money to buy investments.
The common way to do it is a margin account. You buy stock, and use the stock as collateral for a loan from your broker, which you use to buy more stock (not necessarily the same one). You can profit twice as much from a favorable move, but you also lose twice as much from an unfavorable one. That’s 2x leverage, you can use less. The broker also charges interest. The loan is fully collateralized, so if the shares you’re putting up lose value, you have to pay back the excess loan. This situation is called a “margin call”. You can also get leverage using options or buying shares in a fund that is itself leveraged in some way.
Leveraging down means the opposite, usually you keep some cash in reserve, and keep the ratio of cash to investment value balanced. For example, a portfolio of 50% cash and 50% stock has 0.5x leverage, assuming you keep it balanced as the value of the stock changes.
Leverage is the ratio of the amount of the investment you control to the amount of money you need to control it. Buying the investment outright is 1x leverage.
Wise use of leverage is probably required for a good return. I talked about this a bit in How to Lose a Fair Game.
Leveraging up means you are increasing the ratio, which usually means you are borrowing money to buy investments.
The common way to do it is a margin account. You buy stock, and use the stock as collateral for a loan from your broker, which you use to buy more stock (not necessarily the same one). You can profit twice as much from a favorable move, but you also lose twice as much from an unfavorable one. That’s 2x leverage, you can use less. The broker also charges interest. The loan is fully collateralized, so if the shares you’re putting up lose value, you have to pay back the excess loan. This situation is called a “margin call”. You can also get leverage using options or buying shares in a fund that is itself leveraged in some way.
Leveraging down means the opposite, usually you keep some cash in reserve, and keep the ratio of cash to investment value balanced. For example, a portfolio of 50% cash and 50% stock has 0.5x leverage, assuming you keep it balanced as the value of the stock changes.