Leverage

‘Leverage’ is a US term that is also known as ‘gearing’. Both express the extent to which any transaction (for example, a house purchase, private equity acquisition or a carry trade) is financed by debt from lenders as opposed to capital provided by the investor.

For example, if I only have £1 of my own cash to invest and my investment doubles I get £2 back, a 100% profit. However, suppose I had borrowed another £9 in the first place and invested this plus my own £1 in the same project. This time, if the investment doubles to £20, I can repay the £9 loan and keep £11, a 1,000% profit.

The danger with leverage, however, arises if things go wrong - had the investment fallen to zero I would be down £1 of my own cash in the first example, whereas in the second I would have lost my £1 and still owe a bank £9.

• See Tim Bennett’s video tutorial: Three ways leverage can boost your returns.

MoneyWeek magazine

Latest issue:

Magazine cover
Paying by mobile

Why your phone will replace your wallet

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.