Finance Dictionary
Leverage
Definition
The use of various financial instruments or borrowed capital to increase the potential return of an investment.
Deep Dive
Leverage refers to the strategic use of borrowed capital or financial instruments to amplify the potential returns of an investment. In essence, it involves using a relatively small amount of one's own capital to control a much larger asset or investment, with the hope that the returns generated by the larger asset will significantly outweigh the cost of borrowing. This technique is prevalent across various financial sectors, from individuals using mortgages to buy real estate to corporations using debt to finance acquisitions, and investors using margin accounts to trade securities.
Examples & Use Cases
- 1A real estate investor uses a mortgage (borrowed capital) to purchase a property worth several times their initial down payment, leveraging their investment
- 2A private equity firm employs a substantial amount of debt to acquire a target company, aiming to achieve a higher return on their equity investment
Related Terms
Debt-to-Equity RatioMargin TradingFinancial Risk