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Questions and Answers containing leverage
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What is leverage?
Generally speaking, leverage is the use of debt to increase returns. On the most basic level, people who profit on a home typically use leverage. If you buy a $100,000 home with $20,000 down and later sell the home for $110,000, you make only 10% on the total purchase price of the house, but you have made 50% on your initial investment of $20,000. That’s the beauty of leverage. Companies use leverage in borrowing at, say, 8% to build a new factory that generates a 20% return on investment. Investors also use leverage when buying stocks on margin. With leverage, however, comes risk. If the company that bought the factory finds demand has dried up for its products, it may not be able to pay its debt. An investor who buys stock on margin may run into trouble if the stock price falls, leaving the loan insufficiently collateralized. Like sharp instruments and strong spirits, leverage confers many benefits -- but only when used with care.Return to Questions
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