What is leverage in the capital market — and why it's a double-edged sword

Leverage means controlling a position larger than your actual capital — through a loan from the broker or an instrument with built-in leverage. It magnifies both profit and loss in the exact same ratio, so it's not a "trick to boost returns" but a trade-off: double the volatility in exchange for double the exposure. Whoever forgets the other side of that trade pays for it.

On this page: how a margin account works and what a margin call is, a simple example showing what leverage does in both directions, and why leveraged ETFs erode even when the index returns exactly to its starting point.

Margin: A Loan Whose Lender Decides When It Ends

A margin account lets you buy securities with borrowed money, with the portfolio itself serving as collateral. You pay ongoing interest on the loan — that's the simple part. The important part is the margin call: the broker sets a minimum threshold for the equity in the account, and when losses bring you close to it, an immediate deposit is required. No deposit? The broker sells positions on its own, without asking — and usually at the worst possible moment, since the threshold is breached precisely at the low point.

This is the point beginners miss: leverage doesn't just magnify losses, it shortens your ability to wait it out. An unleveraged investor can sit through a 30% decline and wait; a leveraged investor can be wiped out by that very same decline — without even having the option to wait at all.

The Simple Example: 2x in Both Directions

Let's take 10,000 NIS of equity and 2x leverage — meaning exposure of 20,000 NIS:

• The stock rises 10%: The position gains 2,000 NIS — which is 20% on the equity. Quite pleasant.
• The stock falls 10%: A loss of 2,000 NIS — minus 20% on the equity. The exact same number, opposite direction.
• The stock falls 40%: A loss of 8,000 NIS — leaving 2,000 out of 10,000, and the margin call likely arrived much earlier.
• The stock falls 50%: The entire equity is wiped out. The stock has "only" crossed half the way to zero — you got there first.

Leveraged ETFs: The Silent Erosion

Leveraged ETFs (2x, 3x) deliver the multiplier on the daily return — not on the period return. This daily reset creates erosion in volatile markets. Numerical example: an index at 100 drops 10% (to 90) and the next day rises 11.1% — returning exactly to 100. A 3x ETF on the same index: drops 30% (to 70), then rises 33.3% (to 93.3). The index came full circle; the ETF lost almost 7%.

The higher the volatility and the longer the period, the more the effect accumulates. That's why these instruments are built for short, focused trading, and holding them long-term is a bet not only on direction — but also on a smooth path getting there. More on these instruments themselves can be found in the ETF Guide.

What this doesn't mean

Leverage attracts slogans from both directions — both "the fast track forward" and "never under any circumstances." Both miss the point:

• Leverage is not inherently flawed: it's a tool with a price. Small, measured leverage, with a predefined stop and capped risk per trade, is fundamentally different from maximum leverage based on gut feeling.
• Leverage does not change the quality of a decision: it only amplifies the magnitude of its outcome. A bad leveraged decision is the same bad decision — just louder.
• A past leveraged profit is not proof: it means the direction happened to be right this time. The other side of that same trade still exists, and is waiting.