Quick Definition

Leverage in finance refers to the use of borrowed funds to increase the potential return of an investment.

Formula

Examples

• 1A company might use leverage by borrowing money to fund the expansion of its operations, hoping that the generated profits will exceed the cost of the loan.
• 2An investor uses leverage by buying stocks on margin, meaning they borrow money from a brokerage to buy more stocks than they could with just their available funds.
• 3A real estate investor may use leverage by taking out a mortgage to purchase a property, aiming to earn more from rent and appreciation than the interest costs.
• 4A hedge fund might employ leverage by using derivatives like options and futures to amplify their investment exposure with less capital.

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