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Investing 101: What is leverage?
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Leverage involves borrowing money and investing it. If the investment appreciates in value, you earn returns on your money and returns on all the money you borrowed, but if the investment depreciates in value, you lose your money and still owe the money you borrowed. In short, leverage amplifies both the positive and negative effects of investing.
Also, the term leverage can be applied to firms who borrow money. A firm is considered to be highly leveraged if it has much more debt than equity. General Motors, for example, was highly leveraged and therefore had to file for bankruptcy to deal with its very large debts.
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