Back to the OP – a financial definition of “leveraged”…

(Yes, in this example I’m leaving out details like sales commissions, margin interest, time value of money, etc. Once **Daddypants **understands then we can get into that stuff.)

An Example of **Not **Being Leveraged:

You have $1000, cash, in your pocket, right now. It is yours. You own it.

You identify a stock that you think will go up in price. The share price of the stock, right now, is $10/share.

You take your $1000 and buy 100 shares.

The share price goes up to $11/share. In other words, the share price has increased by +10%.

You sell your 100 shares, at $11/share = $1100

You now have $1100, cash, in your pocket.

The share price of the stock increased +10%.

You invested $1000 of your own money and earned $100 on your investment. $100 is 10% of $1000. Your return was also +10% on your *own money*.

An Example of Being Leveraged:

You have $1000, cash, in your pocket, right now. It is yours. You own it.

You borrow $200. It isn’t yours. You don’t own it. It doesn’t matter where you borrow it from (a bank, a friend, a parent) you have to pay it back. You now have $1200 to invest, or 20% ($200) more than what you started with ($1000). You are “20% leveraged” in this transaction.

You take that $1200 and invest it in the same stock from the previous example, at $10/share.

Because you are investing $1200 at $10/share, you are able to buy 120 shares. (In the previous example you were only able to buy 100 shares. In this example you are “20% leveraged”, and notice you are able to buy 20% more shares too. 120 instead of 100.)

The share price goes up to $11/share. In other words, the share price has increased by 10% (same as before).

You sell your 120 shares, at $11 share = $1320

You pay back the $200 you borrowed $1320 – $200 = $1120

You now have $1120, cash, in your pocket.

The share price of the stock increased +10%

But you invested $1000 of your own money and earned $120. $120 is 12% of $1000. Your return was +12%.

Notice that 12% is 20% more than 10%. The stock price rose +10%. *Your *return, on *your *money, was +12%. You were “20% leveraged”, so your return, on your money, was magnified (“leveraged”) by 20% compared to the change in price of the stock.

It Works The Other Way, Too:

You have $1000, cash, in your pocket, right now. It is yours. You own it.

You borrow $200. It isn’t yours. You don’t own it. You have to pay it back. You now have $1200 to invest, or 20% ($200) more than what you started with ($1000). You are “20% leveraged” in this transaction.

You take that $1200 and invest it in the same stock from the previous example, at $10/share.

Because you are investing $1200 at 10/share, you are able to buy 120 shares.

The share price goes down to $9/share. In other words, the share price has decreased by –10%.

You sell your 120 shares, at $9 share = $1080

You pay back the $200 you borrowed $1080 – $200 = $880

You now have $880, cash, in your pocket.

The share price of the stock decreased –10%

You invested $1000 of your own money and lost $120 on your investment. $120 is 12% of $1000. Your return was –12%.

Notice that –12% is 20% more than –10%. The stock price changed by –10%. Your return, on your money, was –12%. You were “20% leveraged”, so your negative return was magnified by 20%.

Leveraged 60%

You have $1000. You borrow $600. You invest $1600 at $10/share. You are “60% leveraged”. You now own 160 shares. The share price rises to $11/share and you sell. 160shares X $11 = $1760. You pay back the $600, $1760 – $600 = $1160. The price of the stock rose +10%. Your return on your money was +16% (you earned $160 on an investment of $1000), or 60% more than the +10% the stock rose.

Leveraged 40%

You have $1000. You borrow $400. You invest $1400 at $10/share. You are “40% leveraged”. You now own 140 shares. The share price falls to $8/share and you sell. 140shares X $8 = $1120. You pay back the $400, $1120 – $400 = $720. The price of the stock fell –20%. Your return on your money was –28%, or 40% more than the –20% the stock fell.

If you borrow $600 and use $1000 of your own money that’d be 0.6:1 leverage (60% leverage). If you borrow $1000 and use $1000 of your own money that’d be 1:1 leverage (100% leverage). If you borrow $2000 and use $1000 of your own money that’d be 2:1 leverage (200% leverage). If you borrow $5000 and use $1000 of your own money that’d be 5:1 leverage (500% leverage). If you borrow $30,000 and use $1000 of your own money that’d be 30:1 leverage (3000% leverage).

Remember that leverage magnifies *your *return on *your *money. It magnifies the gain, it also magnifies the losses(!). If you’re leveraged 30:1 on an investment and it has a positive return, *your* return will be 3000% better!!! You’re a genius!!! If it has a negative return… whoever it was that loaned you all that money is going to come after you with a vengance.