There are several ways in which markets can expand:
- By selling to hitherto closed markets (India, China)
- Through higher productivity- producing goods and services more cheaply
- Globalization - shifting production to low-cost countries
- Opening closed sectors for pvt companies - entering govt. domain of utilities, infrastructure, education and health
- Increasing levels of consumer debt
It is the last one - increasing consumer debt – where leveraging plays a big role.
Leverage can be created through options, futures, margin and other financial instruments. For example, say you have $1,000 to invest. This amount could be invested in 10 shares, but to increase leverage, you could invest the $1,000 in five options contracts. You would then control 500 shares instead of just 10.
Most companies use debt to finance operations. By doing so, a company increases its leverage because it can invest in business operations without increasing its equity. For example, if a company formed with an investment of $5 million from investors, the equity in the company is $5 million - this is the money the company uses to operate. If the company uses debt financing by borrowing $20 million, the company now has $25 million to invest in business operations and more opportunity to increase value for shareholders.