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Glossary Term: LEVERAGE

Definition(s) for LEVERAGE:


1. ) Using debt to acquire assets, build operations and increase revenues. By using debt, a company is attempting to achieve results faster than if it only used its cash available from pre-leverage operations. (2) The use of fixed costs in order to increase the rate of return from an invesmtnet. One example of leverage is buying securities on margin. While leverage can operate to increase rates of return, it also increases the amount of risk inherent in an investment. See operating leverage; financial leverage.

2. ) The ability to control large dollar amounts of a commodity with acomparatively small amount of capital. Limit Order An order in which thecustomer sets a limit on the price and-or time of execution.

3. ) Any means of increasing value and return by borrowing funds or committing less of one's own. For corporations, it refers to the ratio of debt (in the form of bonds and preferred stock outstanding) to equity (in the form of common stock outstanding) in the company's capital structure. The more long-term debt there is, the greater the financial leverage. Shareholders benefit from this financial leverage to the extent that the return on the borrowed money exceeds the interest costs of borrowing it. The market value of the company rises and so do its shares. Because of this effect, financial leverage is popularly called trading on the equity. For individuals, leverage can involve debt, as when an investor borrows money from his broker on margin and so is able to buy more stock than he otherwise could. If the stock goes up, he repays the broker the loan amount and keeps the profit himself. By borrowing money he has achieved a higher return on his investment than if he had paid for all the stock himself. Rights, warrants, and option contracts also provide leverage, not through debt but by offering the prospect of a high return for little or no investment.

4. ) The ability to use a small amount of money to attract other funds, including loans, grants and equity investments.

5. ) In investments, the attainment of greater percentage profit and risk potential. A call holder has leverage with respect to a stock holder - the former will have greater percentage profits and losses than the latter, for the same movement in the underlying stock.

6. ) A term describing the greater percentage of profit or loss potential when a given amount of money controls a security with a much larger face value. For example, a call option enables the owner to assume the upside potential of 100 shares of stock by investing a much smaller amount than that required to buy the stock. If the stock increases by 10 percent, for example, the option might double in value. Conversely, a 10 percent stock price decline might result in the total loss of the purchase price of the option.


See Also:
COUPON LEVERAGE, DOUBLE LEVERAGE, LEVERAGE RATIOS, FINANCIAL LEVERAGE, FINANCIAL LEVERAGE RATIOS, HOMEMADE LEVERAGE, LEVERAGE REBALANCING, OPERATING LEVERAGE, REVERSE LEVERAGE


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