What Are the Risks of Using Leverage?
Video Summary: With leverage, even a small decrease in a market could have a catastrophic effect on your account.
Leverage, or borrowing money, to purchase investments inherently increases the risk of the investment portfolio. The most significant risk is if the investment value goes down to a certain threshold, the firms typically have and absolute right to liquidate your account at whatever price they deem as appropriate in order to make sure that the loan that they made to the investor in order to have that leverage is covered.
So, leverage should only be used for investors who are high risk, and who really understand the risk, and who can watch the market very closely. Because with leverage, even a small decrease in a market could have a catastrophic effect on your account.