If you have a spare $10,000 and invest it in shares which go up 10 per cent then you will have made $1,000. If instead you use not only your own $10,000 but also $40,000 of someone else’s money then you can buy shares costing $50,000 and if they go up by the same 10 per cent then you will have made $5,000 instead of just $1,000.
This is known as “leverage”. It can be achieved in various different ways, all of which have some advantages and some disadvantages. Popular ways to gain leverage are margin lending, instalment warrants and Contracts for Difference (CFDs).
Leverage is a two-edged sword. In the example above, if the shares go down 10 per cent, then you will have lost $1,000 using just own money but $5,000 if you use $40,000 of someone else’s money as well.