What is Leveraging?

Simply put, leveraging is borrowing to invest. The most familiar use of leverage is using a mortgage to buy a home. In return for a down payment you receive funds to purchase an asset that would otherwise be too expensive. The hope is that the home will appreciate in value, and when you sell you will be able to realize a profit over what you bought it for (including interest payments).

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.