In finance, leverage is any technique involving the use of debt rather than fresh equity in the purchase of an asset, with the expectation that the after-tax profit to equity holders from the transaction will exceed the borrowing cost by several multiples — hence the provenance of the word from the effect of a lever in physics, a simple machine which amplifies the application of a comparatively small input force into a correspondingly greater output force. The lender will set a limit on how much risk it is prepared to take and will set a limit on how much leverage it will permit, would require the acquired asset to be provided as collateral security for the loan. For example, for a residential property the finance provider may lend up to, say, 80% of the property's market value, for a commercial property it may be 70%, while on shares it may lend up to, say, 60% or none at all on certain volatile shares. Leveraging enables gains to be multiplied. On the other hand, losses are multiplied, there is a risk that leveraging will result in a loss if financing costs exceed the income from the asset, or the value of the asset falls.
Leverage can arise in a number of situations, such as: leverage their savings when buying a home by financing a portion of the purchase price with mortgage debt. Thus if they buy a house 50% financed by debt, 50% by equity, when they sell the house for double the purchase price, they repay the lender not half the gain as would be the case for equity financing, but only the nominal value of the loan, thus the investor from a 50% leveraging by debt-finance, has increased his wealth by 200%. If he had financed the purchase by further equity, his own or that of a third-party, his gain would only be 100%. Individuals leverage their exposure to financial investments by use of margins. Securities like options and futures are bets between parties where the principal is implicitly borrowed/lent at interest rates of short treasury bills. Equity owners of businesses leverage their investment by having the business borrow a portion of its needed financing; the more it borrows, the less equity it needs, so any profits or losses are shared among a smaller base and are proportionately larger as a result.
Businesses leverage their operations by using fixed cost inputs when revenues are expected to be variable. An increase in revenue will result in a larger increase in operating profit. Hedge funds may leverage their assets by financing a portion of their portfolios with the cash proceeds from the short sale of other positions. While leverage magnifies profits when the returns from the asset more than offset the costs of borrowing, leverage may magnify losses. A corporation that borrows too much money might face bankruptcy or default during a business downturn, while a less-leveraged corporation might survive. An investor who buys a stock on 50% margin will lose 40% if the stock declines 20%. Risk may depend on the volatility in value of collateral assets. Brokers may demand additional funds. Banks may decline to renew mortgages when the value of real estate declines below the debt's principal. If cash flows and profits are sufficient to maintain the ongoing borrowing costs, loans may be called-in.
This may happen at a time when there is little market liquidity, i.e. a paucity of buyers, sales by others are depressing prices. It means that as market price falls, leverage goes up in relation to the revised equity value, multiplying losses as prices continue to go down; this can lead to rapid ruin, for if the underlying asset value decline is mild or temporary the debt-financing may be only short-term, thus due for immediate repayment. The risk can be mitigated by negotiating the terms of leverage, by maintaining unused capacity for additional borrowing, by leveraging only liquid assets which may be converted to cash. On the other hand, the high level of leverage afforded to borrowers involved in forex trading presents low risk per unit due to the relative stability of that market. Compared with other trading markets, forex traders must trade a much higher volume of units in order to make any considerable profit. For example, many brokers offer 100:1 leverage for investors, meaning that someone bringing $1,000 of equity can control a further $100,000 while taking responsibility/ownership for any losses or gains their investments incur.
A 1% gain in the value of $101,000 currency purchased will thus generate a profit of $1,010, a 101% profit on the equity invested. Without the benefit of leverage, the investor would have invested $101,000 of equity and would have gained a profit of only 1%. However, with leverage, if the currency depreciated by 1% the loss would be -101% on the equity invested. There is an implicit assumption in that account, that the underlying leveraged asset is the same as the unlevereged one. If a company borrows money to modernize, add to its product line or expand internationally, the extra trading profit from the additional diversification might more than offset the additional risk from leverage. Or if an investor uses a fraction of his portfolio to margin stock index futures and puts the rest in a low-risk money-market fund, he might have the same volatility and expected return as an investor in an unlevered low-risk equity-index fund. Or if both long and short positions are held by a pairs-trading stock strategy the matching and off-setting economic leverage may lower overall risk levels.
So while adding leverage to a given asset always adds risk, it is not the case that
Gennargentu is a large massif in central-southern Sardinia, encompassing the provinces of Nuoro and Ogliastra. It includes the highest peaks on the island, such as Punta La Marmora, Monte Spada, Punta Erba Irdes, Bruncu Spina and Punta Paulinu; the range forms part of the Gennargentu National Park. Geologically, its rocks are amongst the oldest in Europe, are therefore smooth shaped: rock types include schist and granite; the etymology of the name Gennargentu is not attested: it could mean "Silver Door", "Door of the Winds" or "Door of Absinthium". The mountains are home to the only ski resorts on the island: on Monte Spada, Bruncu Spina, Separadorgiu and S'Arena. Gennargentu National Park
Joshua Adam Langfeld is an American former professional ice hockey player. Today he coaches the 2008 Little Caesars hockey team where Camden plays. Langfeld was drafted in the 3rd round, 66th overall, in the 1997 NHL Entry Draft by the Ottawa Senators, he played four years at the University of Michigan before turning pro. In 1998, Langfeld scored the game-winning goal against Boston College to win the NCAA Championship for the University of Michigan, he has been traded multiple times as he toured the league with the Senators, San Jose Sharks, the Detroit Red Wings, as well as American Hockey League clubs the Grand Rapids Griffins, Milwaukee Admirals and Binghamton Senators. Josh Langfeld career statistics at The Internet Hockey Database Josh Langfeld career statistics at EliteProspects.com