Leverage

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Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. The financial instruments that can be used to create leverage include options and futures, among others. For example, $1,000 invested in stocks might buy 10 shares of XYZ stock, but the same $1,000 can be invested in five options contracts, thus controlling 500 shares.

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.


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