What Is Leverage?
Leverage is a financial tool used to increase the potential return of an investment. It involves borrowing money from a lender, such as a bank or broker, and using it to purchase assets that have the potential for higher returns than what would be possible with just your own capital. Leverage can also refer to other forms of borrowed funds such as margin accounts and derivatives contracts. By leveraging additional funds, investors are able to magnify their gains when prices move in their favor but they must also accept greater losses if prices move against them.
The amount of leverage available depends on the type of asset being purchased and the terms offered by lenders. For example, stocks may require less leverage than real estate investments due to lower risk levels associated with stock purchases compared to property ownership. Additionally, some lenders may offer more favorable terms depending on factors like creditworthiness or collateral provided by borrowers. Ultimately, understanding how much leverage you need and finding suitable financing options will help ensure successful investing outcomes over time.