Accounting
Financial Leverage
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Financial leverage means using borrowed money (debt) to amplify the potential returns on an investment. The idea is simple — if you can earn more on the investment than the interest you pay on the loan, leverage works in your favor.
For example, if you invest $100,000 of your own money and earn 10%, you make $10,000. But if you borrow an additional $400,000 at 5% interest and invest the full $500,000 at 10%, you earn $50,000 minus $20,000 interest = $30,000 profit on your $100,000 — a 30% return instead of 10%.
The downside? Leverage amplifies losses too. If the investment loses value, you still owe the borrowed amount plus interest. High leverage increases both potential reward and risk.