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Using borrowing or other financial exposure to make a position larger than the investor's own funding alone.
A borrowed amount usually remains payable even if the investment loses value. The loss therefore falls first on the investor's own capital. Lenders may require additional collateral or repayment when prices fall, forcing sales at an inconvenient time. Different measures compare debt, assets or derivative exposures with capital, so a reported leverage ratio needs its stated numerator and denominator.
Imagine buying J$1 million of assets using J$250,000 of your own capital and J$750,000 of debt. Assets equal four times equity. If their value falls 10% to J$900,000, subtracting the unchanged debt leaves J$150,000 of equity. The J$100,000 asset loss is 40% of the initial equity, before interest, fees and taxes. A rise would also amplify the equity gain.
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