The term leverage covers the use of debt for the purpose of partial investment financing. The goal is to
boost the potential returns on the investment in
question. The term is also used to indicate the degree to which businesses use borrowed capital to finance their projects. Highly leveraged
companies are exposed to increased risks of bankruptcy in case that they are unable to repay their outstanding
debts. In addition, it may be difficult to find new lenders for future projects.
Financial leverage refers to borrowed funding which is subsequently reinvested, bringing higher returns than the
cost of the interest on the loan. In
general, the debt to equity ratio of the company indicates its
leverage. It is calculated by dividing the total liabilities
by the shareholders` equity. Only long term debt is included in the calculation of the companys financial
leverage.
Leverage also refers to margin accounts in which the brokers lend cash for the purchase of securities. The loan is
secured by collateral in the form of securities or
cash. In case that the value of the shares drops significantly, the margin account holder is obliged to deposit
additional money. Alternatively, he has to sell a certain portion of his shares.
Further along, real estate leverage is an effective method to increase the returns on investments. In essence,
this type of leverage refers to the use of borrowed money for the purchase of real estate property. It is a
known fact that most of the time, real estate properties increase their value with the passage of time.
Moreover, real estate is a long term stable investment. Leverage works best for the properties which appreciate
at the current moment. Good neighborhood, property history, as well as home improvements add to the value of the
property. For instance, renovation and refurbishment of the rooms or the conversion to wooden floor provide some
of the best rates of returns in home improvement.
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