What Exactly Is Leverage?

There are many different contexts in which the word leverage is used.

The two forms of leverage I’m going to focus on in this article has to do with leverage in business and leverage in investing.

The Definition Of Leverage

Before we talk about business or investing, we first need to identify what the textbook definition of leverage is before we can apply it to other concepts.

Leverage is the exertion of force by means of a lever or an object used in the manner of a lever.

So now we understand that in order to get leverage on an object we have to use something else (e.g. a lever) to exert force upon it.

When you use leverage it is always in the service of moving a bigger object that you would’ve had a hard time moving on your own.

Leverage In Investing

Leverage is the investment strategy of using borrowed money to increase the potential return of an investment.

It can also mean how much debt a company is using to fund it’s assets.

So when you hear that a company is heavily leveraged, it’s code for swimming in debt.

The thing with leverage in investing is that it can be a good thing because your returns will be many…