What Is Leverage?

Leverage outcomes from using rented capital as a funding source when investing to increase the firm’s asset base and make returns on risk capital. Leverage is an investment plan of using borrowed money—precisely, the use of numerous financial instruments or borrowed capital—to upsurge the potential return of an investment. Leverage can also refer to the quantity of debt a firm uses to finance assets.

Understanding Leverage

Leverage is the usage of debt (borrowed capital) in order to begin investment or project. The result is to reproduce the possible returns from a project. At the same time, leverage will also multiply the potential downside risk in case the investment does not slam out. When one mentions to a company, property, or investment as “highly leveraged,” it means that item has more debt than impartiality.

The idea of leverage is used by both investors and corporations. Investors use leverage to meaningfully growth the returns that can be delivered on an investment. They lever their investments by using numerous instruments, comprising options, futures, and margin accounts. Companies can use leverage to finance their assets. In other words, instead of supplying stock to increase capital, corporations can use debt financing to invest in business operations in an attempt to rise stockholder price.