Defining financial leverage: understanding its advantages and dangers

Leverage is a financial tool that enables investors or companies to maximize the potential of an underlying asset by increasing returns on investment (ROI) through the use of debt. It involves using a combination of assets, half or more of which are debt-financed, to generate profits. Investors can use financial leverage to increase their returns on investment by using additional capital from external sources.

Companies can also use financial leverage to maximize their returns on investment. Financial leverage can also be used to acquire assets at relatively low cost. For example, by purchasing bonds, shares or fixed assets. The use of financial leverage is common practice in the private equity sector (/en/blog/quest-what-private-equity-pe) and other financial sectors.

In simple terms, financial leverage is a financial technique that involves the use of leveraged funds to increase returns and reduce the cost of acquiring new assets. It is commonly used by institutional and retail investors to maximize returns and diversify portfolios. However, leverage must be controlled and negotiated by qualified professionals to avoid risks and potential losses.