This article is for educational purposes only. Trading with leverage, margin, futures, or derivatives carries a high risk of rapid or total loss. This is not financial advice and should not be used to make trading decisions.
How To Use Leverage In Long-Term Investing To Increase Returns
I’ve traded through bull markets, bear markets, and those grinding sideways years that test your patience, and one thing has always been true: if you can control risk, leverage becomes another tool to adjust exposure in long term investing, not a shortcut to higher returns.
While most traders think of leverage as a short term tool for day trading, it can also used it in longer term positions to fine tune exposure, always with strict risk limits and clear downside scenarios. In this guide, I’ll walk you through the exact principles I teach in my Leverage.Trading education series, from how much borrowed capital to use, to the best products for multi-year holds, to structuring a portfolio that can survive a downturn.
We’ll cover:
- What “long-term leverage” really means, and why it’s different from high-risk speculation
- Which products — from ETFs to derivatives — are worth considering for investors who think in years, not days
- How to calculate your break-even and manage position size using tools like our stop loss calculator and average down stock calculator
- The real world risks, fees, and liquidation factors that many retail investors ignore until they have already taken a hit
If you already understand spot investing, risk management, and how drawdowns work, this guide is about sizing leverage conservatively so that your portfolio can survive shocks and still express your thesis. Used carefully, moderate leverage can tilt a solid long term process, but it will punish weak decisions just as fast.
Key Takeaways
- Long term leverage investing uses borrowed capital to change your exposure over years, which magnifies both gains and losses compared with an unleveraged portfolio.
- Keeping leverage low, often in the 1:1.5 to 1:3 range, helps many experienced investors keep risk within a range they can actually manage when markets move against them.
- ETFs, certificates, and derivatives are the most common long-term leverage products, each with different risk profiles.
- Interest costs, market drawdowns, and liquidation risk make disciplined portfolio structuring essential.
- Success comes from compounding good investment decisions, not chasing maximum leverage ratios.
What does it mean to be leveraged in long-term investing?
To be leveraged in a long term investment means that you use borrowed funds to increase your position size, which changes both the speed and size of your potential gains and losses. This idea builds on the same principles as leverage in trading, where added buying power amplifies both gains and potential losses over time.
This can be used either by borrowing money from a bank or directly from a crypto exchange that offers high leverage.
When you open positions that are bigger than what your current account balance allows for it means that you are leveraging your long-term investments. Access to leveraged products has become much wider and many retail platforms now offer them, which makes it simple to start using leverage but much harder to stay in control of the risk.
The usual reason investors increase their buying power is to express a stronger view in assets they already believe in, like stocks, indices, commodities, or some funds, knowing that this also increases the impact of being wrong.
Investors who combine leverage with strong stock selection can see very different outcomes from those who stay unleveraged, but at ratios like 1:10 even a normal market swing can turn into a brutal drawdown, so most long term investors keep their effective leverage much lower.
However, this does not come without added risks. When you boost your investing schemes with funds you also run the risk of losing money faster than normal and if you fail in your stock picking, you might end up getting liquidated.
What is a leveraged investment?
An investment is any investment in any asset class where you use borrowed funds to increase your buying power. For example, a stock can be a leveraged investment if you have access to more capital either from a bank loan or through a stock exchange that offers leverage.
Today there are many instruments that let retail investors take on more exposure with the same amount of capital, and one of the most commonly used in long term portfolios is the leveraged ETF. The reason why ETFs have grown in popularity as a margin-traded product is due to the accessibility and the low cost offered.
Here is a list of asset classes and investment products that are used in combination with leverage:
- Stocks
- ETF
- Index
- Commodities
- Funds
- Options
- Derivatives
These products all operate slightly differently which makes some of them better suited for investors who have a longer outlook on the market and some of them suit investors who are looking for returns in the medium term. Scroll down on the page to learn more about how these products work.
Should you borrow money to invest in stocks?
Many investors like the idea of growing a small account into something much larger in a short time, but doing that safely is rare and usually requires years of experience in stock selection and risk management.
For an average market participant, adding leverage does not magically fix performance. It simply makes both good and bad decisions hit the account harder. If your process is weak, leverage will expose that very quickly.
A better use of tools like our average cost stock calculator is to track your break even point so you understand how sensitive your position is to price moves and how much room you really have before a drawdown becomes unacceptable.
The decisions on whether you should borrow money to invest in stocks have to be made by each investor but if you are not sure whether it would be a good fit for you or not, I have listed some reasons for and against it.
The table below is simply meant to help you make your decision a little bit easier. Read the list and see which side resembles best your personality.
| Yes | No |
| I have a medium to high-risk tolerance | I don’t want to take on extra risks |
| I understand that using leverage means I can lose the full amount I put at risk and I accept that possibility before I start | I don’t know how to control a leveraged position in the market |
| I am fine with increased fees and commission | I am afraid of getting liquidated |
| I have previous experience in structuring a portfolio | I don’t understand how these products work |
| I want to pay as few commissions and fees as possible |
Keep in mind that these are simply guidelines and are not a make-it-or-break-it recipe for everyone. Some of you might have very little experience with these products but you have sufficient knowledge from previous stock investing.
Examples of some investment products
Today there are various products that let investors increase their exposure with added purchasing power, each with very different risk and fee profiles. Depending on your time frame and your risk tolerance these instruments are widely available through many brokers and exchanges, but “cheap to trade” does not mean “low risk,” especially when leverage is built in.
Keep in mind that whenever you add borrowed money into the mix there is an interest to be paid to your broker, much like the same way you pay interest to your bank on a mortgage.
This interest payment is called the overnight fee, or the management fee, and is one way for brokers to make money on leverage.
Below is a list of some of the most popular products for investors. Take your time to learn the differences and perhaps you can find a new product that is suited to your style of investing.
- ETF – A leveraged ETF is an exchange-traded fund that can be found by many stockbrokers and it aims to track an underlying stock, index, or other asset classes. A leveraged ETF aims to track the daily performance of an underlying asset or index with a fixed leverage factor, for example two or three times the daily move. That extra exposure can magnify returns in strong trends, but it also magnifies drawdowns and can drift away from the underlying over time. The standard ratio for an ETF is between 1:2, 1:3, and 1:5.
- Certificates – Certificates are usually offered by a bank or an online bank and they often track underlying security such as a commodity, a stock, a bond, or a national currency. Certificates tend to have a higher margin ratio than ETFs and can offer borrowed money with a ratio of up to 1:10. This increases the risk factor when compared to other products and only should only be used by investors with high risk tolerance and good experience in picking financial assets and know-how to manage their positions.
- Derivatives – Derivatives trading risks are prominent across most products on the market as they offer the highest level of leverage. Investors are only required to add a small initial investment as margin requirement which can be as little as 1-2% of the total position size. This translates into ratios of up to 1:100, something that should not be attempted by a novice investor. In the same way, like many other products, derivatives get their pricing from an underlying security such as a stock, a commodity, a currency, or an index. Many investors leverage trade crypto with derivatives.
- Funds – Some funds are passively investing in other products that have built-in margin. When you invest in a leveraged fund you usually don’t carry the risk of liquidation should the fund perform poorly during a market crash. This structure means you do not usually face margin calls directly, but you still absorb the fund’s losses and fee drag. Leveraged funds can simplify access to leverage, they do not remove the underlying risk. The cost of buying these funds is usually greater as you have to compensate for the interest payments that the fund is putting out.
- Options – Options are somewhat complex products that offer sometimes high leverage and a fixed risk on each trade. The risk you pay is the premium you put down to open the option contract and the credit is indicated in the contract you buy or sell. Options are complex instruments that can offer defined risk per trade but require a solid understanding of pricing, volatility, and assignment. They can help experienced investors shape their payoff profile, but they are not a shortcut to “more return with less risk,” and they are a poor fit for anyone who has not fully grasped how the contracts behave.
How to structure your portfolio
How to structure a margin-traded portfolio you may ask? There are different ways to go about this but the main focus should always be longevity and long-term success.
Opting for quick gains in an investment portfolio with increased buying power can be very dangerous and should be avoided. The first thing I would like to point out is that the lower your ratio is, the higher your chance of success.
Many disciplined investors who use long term leverage keep their effective ratios in the 1:1.5 to 1:3 range. That level of exposure still changes outcomes in a meaningful way, but keeps full wipeout levels further away than the extreme ratios you see advertised on trading platforms.
Now let’s take a look at how disciplined and experienced investors might structure a portofolio that focuses on risk.
Step 1
The first step is to decide how much money you can invest in your portfolio. The amount you choose should be an amount that you are comfortable losing if the market suddenly collapses under your feet (which is a possibility). Keep in mind that you can always re-invest in your portfolio monthly or whenever your economic situation improves
Step 2
Depending on your personal risk tolerance and your capital you have different options of markets and products to choose from. Please adhere to our examples above to see which kind of product and asset class would suit you well.
If you already know which asset class you are going to invest in, then the job is much easier. If you are not comfortable yet with investing with leverage, I recommend you spend more time researching each product, the overall risk profile, and asset class to see which one suits you best.
Step 3
Now it’s time to choose a stock exchange or an investment platform where you will structure your portfolio. I would recommend checking with your local exchanges, online banks, or even your bank for trustworthy solutions. You always want to choose a broker with a reputation and is regulated by your local government, anything else is a big no.
Step 4
Once you have your capital, products, and a reputable exchange or broker in place, the next step is to balance the portfolio so that you can tolerate the swings that come with leverage without losing sleep every time the market drops.
A mix of index exposure and individual stocks is a common structure in long term portfolios. Adding modest leverage on top of that can make your equity curve move more than the underlying market, both in rallies and in drawdowns. Below is a table showing you three different ways to structure your portfolio seen from a risk perspective.
| Low risk | Medium risk | High risk |
| 60% Index funds 20% Blue chip stocks 20% Low leveraged ETFs | 20% Index funds 40% Blue chip stocks 20% Medium cap stocks 20% Medium Leveraged ETFs | 50% Medium cap stocks 50% High leveraged ETFs |
How leverage might increases your overall returns
Investors often wonder how leverage changes the returns in their investment portfolio, and the basic math is straightforward even if the real world risk is not. I will give an example where our friend Joe is investing in stocks without margin, or 1x leverage ratio and his brother Jeff invests with leverage.
Both brothers will invest in the same stock and they will both start with $2000 with the only difference being that Jeff will use a 1:3 ratio in his portfolio. Both brothers will invest in the Tesla stock which will make a 25% gain in one year, let’s see how the different portfolios will react to this increase.
| Joe 1:1 | Jeff 1:3 | |
| $2000 + 25% gain | +$500 | +$1500 |
During this year of investing in Tesla, Joe made a profit of +$500 while Jeff made a profit of +$1500. But how does this work how is this calculated? See our calculation below to understand exactly how leverage boosts your investment profits.
| Joe: $2000 + 25% gain $2000 + 0.25% = $500 | Jeff: $2000 x 3 = $6000 $6000 + 25% gain $6000 x 0.25% = $1500 |
The simple explanation is that Jeff made 3 times his money due to the 1:3 leverage ratio he used.
In a falling market the same math works in reverse. A moderate drawdown in the unleveraged account can turn into a painful or even account-killing loss when leverage is stacked on top.
What are the risks?
- Larger losses/drawdowns – It is true that when you invest with increased capital you might suffer from larger losses or larger drawdowns or a bear market while the market is falling or is just being negatively surprised during the short-term. This is something that you should be aware of and in the same way that Jeff made 3 times his money during a year, you might lose a third of your money very fast. See our guide on “how does leverage affect losses in trading?” to learn more.
- Higher fees – If you are a medium-term investor and like to buy and sell after just a couple of weeks of holding time you are going to pay higher fees only for buying and selling. Another fee you need to pay attention to is the overnight fee or the management fee that many brokers charge for the use of borrowed funds.
- Liquidation – The most immediate risk to investing with credit is the fact that you can get liquidated. This happens when your losses exceed the support provided by your margin in trading, leaving your position without enough collateral to stay open.
A liquidated portfolio loses all funds and is left out at a shameful 0. You should do everything in your power to avoid this, including the use of a stop-loss. - Shady trading platforms – When you deal with leverage, some platforms might try to scam you off your money so always make sure that you are investing your money on a platform that is trustworthy, regulated, and preferably local in your country.
- Margin call – A margin call is a warning signal from your broker that you are running out of funds due to your losses. This is something that can only happen when you invest with leverage.
Benefits and drawbacks
| Pros | Cons |
| More flexible exposure sizing for experienced investors | Risk of large losses |
| Lets you express a stronger view without tying up as much cash | Can be very stressful during drawdowns |
| Can help a well tested strategy make better use of capital in strong trends | Risk of total liquidation |
| Can be integrated into longer term plans where trade frequency is lower | Higher fees (buy/sell + management) |
| Can improve outcomes in a strong bull market if risk is managed well | Many brokers are misleading |
What other investors ask
Is investing with leverage a good idea?
It can be one tool in a long term portfolio for experienced investors who already manage risk well, but it is not necessary and it increases the speed and size of both gains and losses even at low ratios.
What is a good leverage ratio for investing?
Many cautious long term investors who use leverage at all stay roughly in the 1:1.5 to 1:3 range. Anything higher than that starts to behave more like trading than investing.
Does leverage increase profit in the long run?
Leverage increases the size of your outcomes. If your process is robust and you can handle deep drawdowns, it can improve results. If your process is weak, it will usually speed up losses and blow ups.
Is investing with leverage worth it?
It may be worth exploring only if you already have a proven, risk controlled approach and you are comfortable seeing your account swing more on the downside as well as the upside. For many investors, staying unleveraged is the simpler and safer path.
How do 3x leveraged stocks work?
When you invest in a 3x leveraged stock you increase your buying power by 3 times. For example, if your capital is $1000 and you invest in a 3x leveraged stock your new buying power will be $3000.
What happens if you lose on a leveraged investment?
Your investments lose money faster when you add margin to the mix. Always keep an eye out for the margin capital in your investment account to avoid liquidation.
Anton Palovaara
This article is published under Leverage.Trading’s Risk-First Education Framework, an independent learning system built to help traders quantify and manage risk before trading.
