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What is Leverage?
In finance, leverage (also referred to as gearing) refers to the use of debt to supplement investment. Companies usually leverage to increase returns to stock or profits, as this practice can maximize gains (and losses).
A simple example of financial leverage: Say you have $10 that you want to invest in a stock. If you invest that $10 and it goes up 10%, you've made $1. However, if you're able to borrow an additional $90 to purchase that stock, you'd have $100 total to invest. If that stock goes up 10%, you've made $10. This is leverage: borrowing money to magnify returns. (Of course, losses are magnified as well.)
What is Gearing?
In finance, leverage (also referred to as gearing) refers to the use of debt to supplement investment. Companies usually leverage to increase returns to stock or profits, as this practice can maximize gains (and losses).
A simple example of financial leverage: Say you have $10 that you want to invest in a stock. If you invest that $10 and it goes up 10%, you've made $1. However, if you're able to borrow an additional $90 to purchase that stock, you'd have $100 total to invest. If that stock goes up 10%, you've made $10. This is leverage: borrowing money to magnify returns. (Of course, losses are magnified as well.)
What is Gearing?