Leverage

Leverage is taking advantage of debt or borrowed capital to boost the return on an investment. It tells us a lot about how much power someone has over an asset in relation to the amount invested.

When used properly, leverage can be advantageous as it allows investors to amplify potential returns without investing more of their money. But, when not managed cautiously it could prove highly risky.

A Scenario : Understanding Leverage

Jack is a successful entrepreneur who runs a small software company. Although they have had a strong customer base for a few years, Jack is now striving to take their business to the next level.

Despite Jack’s desire to invest in new technology and expand the team, he is limited due to financial constraints.

Jack was introduced to the concept of leverage by a financial advisor he met. Leverage involves using debt or other instruments to boost an investment’s potential returns. This is what Jack was explained by his advisor.

With Jack’s enthusiasm towards growth, the company takes out a loan to put into new technology & more staff in order to help develop the business. Leverage is a great tool for this kind of situation.

Jack’s investment turns out to be a sound one, and he soon witnesses considerable growth in his business. The increased income courtesy of the latest technology & human resources makes it possible to repay the loan and continue investing in the enterprise.

Jack has been able to achieve his business objectives by raising the necessary capital through leverage. Debt financing has allowed Jack to gain a higher return on investment, driving the success and expansion of his enterprise.