Leverage Definition

To leverage an asset is to use it in such a way that the best possible outcome is achieved. In personal finance, leverage almost always involves assuming more debt to invest in some opportunity. As debt is accumulated, so to is risk because in any investment there is always a potential to lose all or some of the invested funds-yet the debt must always be repaid.

Various formulas are used to determine how much leverage an individual should accept; bear in mind that risk is often realized. For example, your company might issue a limited time offer to allow employees to purchase company stock at a discount. You might leverage your good credit rating to obtain a large bank loan, and use the borrowed funds to purchase discounted company stock. When the loan comes due, you would sell some or all of the company stock at the non-discounted market value, pay off the loan, pay capital gains tax, and pocket the income. Note that this scenario relies entirely on the company stock retaining its value for the duration of the scenario.