What is leverage and how does it work?

Leverage is any technique that amplifies investor profits or losses. It's most commonly used to describe the use of borrowed money to magnify profit potential (financial leverage), but it can also describe the use of fixed assets to achieve the same goal (operating leverage). How Does Leverage Work?

How is consumer leverage calculated?

Consumer Leverage is derived by dividing a household's debt by its disposable income. Households with a higher calculated consumer leverage have high degrees of debt relative to what they make and are therefore highly leveraged. Consumers may eventually find difficulty in securing loans if their consumer leverage gets too high.

What is a high operating leverage?

Rather, it’s a company’s ratio of fixed costs to variable costs. Companies with high ongoing expenses, such as manufacturing firms, have high operating leverage. High operating leverages indicate that if a company were to run into trouble, it would find it more difficult to turn a profit because the company’s fixed costs are relatively high.

Do you use leverage when buying a house?

You might use leverage when you do the following: Buy a home: When you purchase a house with a mortgage, you are using leverage to buy property. Over time, you build equity—or ownership—in your home as you pay off more and more of the mortgage. This is how you earn a return on your investment in your home.