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Leverage


Leverage is the use of debt to increase returns, buying power, capital, or asset financing. A firm or individual is leveraged when they use borrowed capital to increase or generate returns, or use debt to finance assets.

Leverage is the use of borrowed funds to enter into an investment or project, with the intent of multiplying the returns to cover the debt. However, leverage increases the risk associated with an investment or project, especially if the investment or project does not generate the anticipated return. An investment is considered highly leveraged when it has more debt than equity.

Investors use leverage to increase the return of an investment through options, futures, and margin contracts. Instead of issuing stock to raise capital, companies can use leverage to finance their business operations and increase shareholder value.