What is leverage?

The same move, a bigger swing

If you have $10,000 and borrow $20,000 more, you hold $30,000 of stocks: three times leverage. If the stocks rise 10% you make $3,000, 30% on what you put in. If they fall 10% you lose $3,000. The loan has to be repaid however it goes, and interest is paid meanwhile. Change the numbers:

At ten times leverage, a fall of 10% is enough to wipe out the whole stake. A larger fall means you have lost more than you put in.

One real day

The S&P 500's largest one-day fall since Jan 3, 2000 came on Mar 16, 2020, −12.0%. How that day would have hit $10,000 at different leverage:

At 9 times leverage that single day took −108% of the stake. Someone who borrowed against their stocks often gets a margin call on such a day too, and may be forced to sell near the bottom. More large falls are in the study of market crashes.

Where the loss stops at the stake, and where it does not

Leverage comes in many forms. In some you cannot lose more than you paid: a bought warrant, a leveraged ETF and a bought option. In others the loss can exceed the stake: buying with borrowed money, futures, short selling and a written option. That difference matters most before anything is bought with leverage.