Leverage

Leverage refers to the use of borrowed capital (debt) to increase the potential return on an investment. By using leverage, investors and companies can control a larger asset base with less equity. While leverage can amplify returns, it also increases risk, as losses are also magnified. In financial markets, leverage is commonly used in trading, real estate, and corporate finance to enhance profitability, but it requires careful risk management to avoid significant losses.

Example

An investor borrows money to buy more shares in a rising market, hoping to amplify their returns through leverage. However, if the market declines, their losses will also be magnified.