Leverage refers to the use of debt (borrowed funds) to increase the returns on an investment or project.
Investors use leverage to multiply their purchasing power in the market.
Companies use debt to finance their assets – Instead of issuing shares to raise capital, companies may use debt to invest in business operations in an attempt to increase shareholder value.
There are a number of financial leverage ratios to assess the riskiness of a company’s position, the most common of which are the ratio of debt to assets and debt to equity.
Abuse of leverage can have serious consequences, as some believe it played a role in the 2008 global financial crisis.