Leverage (finance)

Leverage (finance)

In finance, leverage (sometimes referred to as gearing in the United Kingdom, or solvency in Australia) is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:

  • A public corporation may leverage its equity by borrowing money. The more it borrows, the less equity capital it needs, so any profits or losses are shared among a smaller base and are proportionately larger as a result.
  • A business entity can leverage its revenue by buying fixed assets. This will increase the proportion of fixed, as opposed to variable, costs, meaning that a change in revenue will result in a larger change in operating income.
  • Hedge funds often leverage their assets by using derivatives. A fund might get any gains or losses on $20 million worth of crude oil by posting $1 million of cash as margin.

Read more about Leverage (finance):  Measuring Leverage, Leverage and ROE, Leverage and Risk, Worked Example, Leverage and Bank Regulation, Leverage and The Financial Crisis of 2007–2009

Other articles related to "leverage":

Leverage (finance) - Leverage and The Financial Crisis of 2007–2009
... of 2007–2009, like many previous financial crises, was blamed in part on "excessive leverage" However, the word is used in several different senses ... For most of this, "leverage is a euphemism as the borrowing was used to support consumption rather than to lever anything ... house purchases or buying stocks, were using leveragein the financial sense ...