Leverage is a term used in finance that refers to the use of borrowed funds to buy an investment, with the expectation that future profits will be greater than the cost of borrowing). It is a technique that can be used to amplify returns from an investment or project. Leverage can arise in a number of situations, such as when securities like options and futures are used, or when equity owners of businesses borrow a portion of their needed financing).

Leverage can be used by both investors and companies. Investors use leverage to significantly increase the returns that can be provided on an investment, while companies use leverage to finance assets and expand their equity base. Financial leverage is a measure of how much debt a company has in relation to the amount of money its shareholders invested in it, also known as its equity.

Leverage can offer investors a powerful tool to increase their returns, although using leverage in investing comes with some big risks, too. Leveraging in investing is called buying on margin, and it’s an investing technique that should be used with caution, particularly for inexperienced investors, due to its great potential for losses.

Two ratios are used to measure a company’s leverage: debt-to-equity and debt-to-total-assets. Comparing these ratios with those from other companies in the same industry illustrates their utility.

In summary, leverage is a technique used in finance that involves borrowing funds to buy an investment, with the expectation that future profits will be greater than the cost of borrowing. It can be used by both investors and companies, and can offer a powerful tool to increase returns, but it also comes with risks.