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Risk magnified by use of margin and leverage

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Why is risk magnified when we use something called margin and leverage?

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Solution Summary

This posting explains the terms 'margin' and 'leverage' and and answers as to how risk is magnified by their use.

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Risk is magnified when we use margin and leverage.

Margin implies borrowed money that is used to purchase securities, referred to as "buying on margin". It also implies the amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account.

Buying with borrowed money can be extremely risky because both gains and losses ...

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