Financial Leverage
What is Financial Leverage?
Financial leverage refers to the use of borrowed funds or financial instruments, such as debt or derivatives, to increase the potential return on an investment or to amplify the potential impact of a change in the value of the investment. Financial leverage can be used by individuals or businesses to increase their buying power or to invest in assets that may have a higher return than the cost of borrowing.
Financial leverage can be calculated by dividing the total amount of debt or financial instruments used by the amount of equity or capital invested. A higher financial leverage ratio indicates a greater use of debt or financial instruments, and a lower financial leverage ratio indicates a lower use of debt or financial instruments.
Financial leverage can be a powerful tool for increasing the potential return on an investment, but it can also increase the risk of loss if the value of the investment decreases. This is because the use of financial leverage amplifies the potential impact of a change in the value of the investment, both positive and negative.
Overall, financial leverage refers to the use of borrowed funds or financial instruments to increase the potential return on an investment or to amplify the potential impact of a change in the value of the investment. It can be a powerful tool for increasing the potential return on an investment, but it can also increase the risk of loss if the value of the investment decreases.
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