Financial Leverage refers to the use of borrowed money (or debt) to increase the potential return on an investment.

Key ideas:

• Positive leverage: If the return on the investment is higher than the cost of borrowing, leverage amplifies profits.
• Negative leverage: If the return is lower than the borrowing cost, leverage amplifies losses.

Types of leverage:

• Operating leverage: How fixed costs affect a company's profits—higher fixed costs mean higher risk but also greater potential reward.
• Financial leverage: Using debt to finance operations or investments (common in real estate, businesses, and stock trading).
• Leverage in trading: Brokers may let traders control a large position with a small amount of capital (called margin trading).

Example:

If an investor puts in $10,000 of their own money and borrows $90,000 to buy a $100,000 property, they are using 10x leverage. A small change in value has a big impact on their equity.