Leverage refers to the use of borrowed funds to finance investments or operations. In finance, leverage is typically measured as the ratio of debt to equity, or the amount of debt a company has relative to its equity.
Leverage can amplify the potential returns on an investment, as well as the potential losses. This is because borrowed funds often come with interest payments, which increase the cost of the investment, and can reduce the overall return. However, if the investment performs well, the return on the investment may be higher than the cost of the borrowed funds, resulting in a net gain for the investor.
On the other hand, if the investment performs poorly, the investor may be unable to repay the borrowed funds, resulting in a loss. This is why leverage can be risky, and investors should carefully consider their risk tolerance before using leverage to finance their investments.
In business, leverage can also refer to the use of other resources, such as technology or human capital, to improve productivity and efficiency. This type of leverage can help companies to grow and compete in the marketplace, without relying solely on financial leverage to achieve their goals.
