TeachMeFinance.com - explain leverage
leverage -- (1) the use of borrowed money to increase the return on a cash investment. For leverage to be profitable, the rate of return on the investment must be higher than the cost of the borrowed money. (2) the use of a relatively small amount of capital to control a large dollar amount of a commodity or cash instrument by buying on margin. In the futures market, the margin is a good faith performance bond. In the cash market, the margin is an actual down payment. (3) the effect on the earnings per share of the common stock of a company when large sums must be paid for bond interest or preferred stock dividends before earnings are paid to holders of common stock.
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