What is leverage?


For our purposes, leverage, is borrowing money in order to increase a potential return. For example, I could use my savings of $50,000 to start a farm using 10 acres. Or I could borrow $500,000, enabling me to use 100 acres. On 10 acres, I have a potential profit of $10,000. That is, at the end of the year I can pay back the principal I borrowed of $50,000 and have an additional $10,000 left over. If I use leverage I have a potential profit of $100,000. I also have added risk that if Iā€™m wrong, I could loose $500K.

Written on September 7, 2016