Leverage is most commonly used in real estate
transactions through the use of mortgages to purchase a home.
The Help of Leverage
Leverage helps both the investor and the firm to invest or operate. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would've been if the investment had not been leveraged - leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value.
The Help of Leverage
Leverage helps both the investor and the firm to invest or operate. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would've been if the investment had not been leveraged - leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value.
The
Definition of Leverage is:
1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.
Measuring Leverage
A good deal of confusion arises in discussions among people who use different definitions of leverage. The term is used differently in investments and corporate finance, and has multiple definitions in each field and also a general term for any technique to multiply gains and losses.
1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.
Measuring Leverage
A good deal of confusion arises in discussions among people who use different definitions of leverage. The term is used differently in investments and corporate finance, and has multiple definitions in each field and also a general term for any technique to multiply gains and losses.
.jpg)
According
in Investopedia the explanation of Leverage
1. Leverage can be created through options, futures, margin and other financial instruments.
2. Most companies use debt to finance operations. By doing so, a company increases its leverage because it can invest in business operations without increasing its equity.
1. Leverage can be created through options, futures, margin and other financial instruments.
2. Most companies use debt to finance operations. By doing so, a company increases its leverage because it can invest in business operations without increasing its equity.
