Difference between revisions of "Leverage"

From MarketsWiki
Jump to: navigation, search
Line 1: Line 1:
 
{{helpAddContent}}  
 
{{helpAddContent}}  
  
The use of [[borrow]]ed [[fund]]s along with owned funds for [[investment]] is called leverage. The ratio of borrowed funds to own funds (or debt to equity) is called the [[leverage ratio]].<ref>{{cite web|url=http://www.sjsu.edu/faculty/watkins/leverage.htm|name=Capital Leverage: Financial Intermediation|org=San Jose State University Economics Department|date=December 9, 2008}}</ref>
+
The use of [[borrow]]ed [[fund]]s along with owned funds for [[investment]] is called leverage. The ratio of borrowed funds to own funds (or debt to equity) is called the [[leverage ratio]].<ref>{{cite web|url=http://www.sjsu.edu/faculty/watkins/leverage.htm|name=Capital Leverage: Financial Intermediation|org=San Jose State University Economics Department|date=December 9, 2008}}</ref> Leverage involves the use of various [[financial instrument]]s, including [[options]] and [[futures]].
+
Leverage is the use of various [[financial instrument]]s, including [[options]] and [[futures]].
+
  
 
Leverage also refers to the amount of [[debt]] used to finance a firm's [[asset]]s. A firm with significantly more debt than [[equity]] is considered to be highly leveraged. Companies use debt to finance their operations. This increases their leverage because it enables them to invest in business operations without increasing equity.
 
Leverage also refers to the amount of [[debt]] used to finance a firm's [[asset]]s. A firm with significantly more debt than [[equity]] is considered to be highly leveraged. Companies use debt to finance their operations. This increases their leverage because it enables them to invest in business operations without increasing equity.
  
 +
[[Portfolios]], however, become [[risk]]ier with leverage. With too much leverage, a market downturn can wipe out all of the [[equity]] and leave the [[investor]] with more [[debt]] than [[asset]]s.<ref>{{cite web|url=http://www.forbes.com/investoreducation/2007/08/20/leverage-debt-margin-pf-education-in_ty_0820investopedia_inl.html|name=Living With Leverage|org=Forbes.com|date=December 9, 2008}}</ref>
 
   
 
   
 
{{Infobox Midpage Need Sponsor Right}} <!-- Keep this template fairly close to the top of the article -->
 
{{Infobox Midpage Need Sponsor Right}} <!-- Keep this template fairly close to the top of the article -->

Revision as of 10:07, 9 December 2008


The use of borrowed funds along with owned funds for investment is called leverage. The ratio of borrowed funds to own funds (or debt to equity) is called the leverage ratio.[1] Leverage involves the use of various financial instruments, including options and futures.

Leverage also refers to 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. Companies use debt to finance their operations. This increases their leverage because it enables them to invest in business operations without increasing equity.

Portfolios, however, become riskier with leverage. With too much leverage, a market downturn can wipe out all of the equity and leave the investor with more debt than assets.[2]

Template:Infobox Midpage Need Sponsor Right

References

  1. Capital Leverage: Financial Intermediation. San Jose State University Economics Department.
  2. Living With Leverage. Forbes.com.