Leverage means using borrowed money to increase potential returns. It is a magnifying glass for gains and losses. Put $10,000 of your own money into an investment and borrow $90,000 more. You control $100,000. If the asset rises 10 percent, you gain $10,000 on a $10,000 stake, a 100 percent return. If it falls 10 percent, you lose your entire stake and still owe the loan.

Leverage appears throughout finance. Companies borrow to fund expansion. Homebuyers use mortgages, which are a form of leverage. Traders use margin accounts. Hedge funds use derivatives to amplify positions. Private equity firms buy companies with mostly debt. Each use carries different risks and regulations.

The danger is that leverage cuts both ways. A small adverse move can wipe out equity. During the 2008 financial crisis, excessive leverage in mortgage-backed securities turned a housing downturn into a global collapse. Regulators now impose leverage limits on banks and brokers. Individual investors face margin calls if positions fall too far. Leverage can build wealth quickly. It can also destroy it faster. The key is knowing how much you can afford to lose.

Common forms

• Margin trading
• Mortgages
• Corporate debt
• Derivatives
• Private equity buyouts