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Related to leverage: Leverage ratio, Financial leverage


The use of debt financing, or property of rising or falling at a proportionally greater amount than comparable investments. For example, an option is said to have high leverage compared to the underlying stock because a given price change in the stock may result in a greater increase or decrease in the value of the option. Also, commonly known as Gearing in Europe.


1. To use debt to finance an activity. For example, one usually borrows money in the form of a mortgage to buy a house. One commonly speaks of this as leveraging the house. Likewise, one leverages when one uses a margin in order to purchase securities.

2. The amount of debt that has been used to finance activities. A company with much more debt than equity is generally called "highly leveraged." Too much leverage is thought to be unhealthy, but many firms use leverage in order to expand operations.


The use of fixed costs in order to increase the rate of return from an investment. One example of leverage is buying securities on margin. While leverage can operate to increase rates of return, it also increases the amount of risk inherent in an investment. See also financial leverage, operating leverage.


Leverage is an investment technique in which you use a small amount of your own money to make an investment of much larger value. In that way, leverage gives you significant financial power.

For example, if you borrow 90% of the cost of a home, you are using the leverage to buy a much more expensive property than you could have afforded by paying cash.

If you sell the property for more than you borrowed, the profit is entirely yours. The reverse is also true. If you sell at a loss, the amount you borrowed is still due and the entire loss is yours.

Buying stock on margin is a type of leverage, as is buying a futures or options contract.

Leveraging can be risky if the underlying instrument doesn't perform as you anticipate. At the very least, you may lose your investment principal plus any money you borrowed to make the purchase.

With some leveraged investments, you could be responsible for even larger losses if the value of the underlying product drops significantly.






The effect borrowed money has on an investment;the concept of borrowing money to buy an asset that will appreciate in value, so that the ultimate sale will return profits on the equity invested and on the borrowed funds.

Example: Mark and Amy each have $100,000 to invest. They can buy rental houses for $100,000 per house and collect rent of $1,100 per month for each house. At the end of 5 years, they will be able to liquidate and sell their houses for $150,000 each. Amy uses leverage and Mark does not.

References in periodicals archive ?
To investigate the impact of financial and operating leverage on profitability, return on the owner's equity (ROE), return on assets (ROA) and net profit.
Negotiating leverage is a wonderful, powerful and very profitable characteristic that all companies should aspire to possess.
Another practical consideration of the leverage model stems from requiring qualified equity investments to be maintained for seven years.
As he releases off the line on an inside leverage path, the receiver must train his eyes on the DB.
As a consequence, Leverage Leasing's ordinary and necessary business expenses exceeded gross income for 1984 and 1985, which resulted in no tax liability.
Leverage plays a positive role in our financial system, resulting in greater market liquidity, lower credit costs, and a more efficient allocation of resources in our economy.
We don't want the blocker to roll his hips, as this will cause him to raise up and lose his leverage.
This second stage of the movement is characterized by deals with lower leverage and greater up-front equity.
The central public policy issue raised by the LTCM episode is how financial leverage can be constrained most effectively in our market-based economy.