Leverage.

In plain English

Leverage is the use of borrowed money to fund an investment or an operation, so that a smaller amount of your own money controls a larger position. The word describes the effect: a lever multiplies force, and debt multiplies both gains and losses on the money you actually put in. For a company, leverage is usually measured against earnings, comparing total debt to annual profit, and rating agencies watch that ratio closely because it estimates how comfortably a borrower can service what it owes. Leverage is not automatically dangerous. A mortgage is leverage. What makes it risky is a fixed payment sitting on top of an income that is not fixed.

01Why it matters

Leverage is why a small move in the underlying thing can double or erase the money you put in. It is also why lenders and rating agencies look past the profit headline to the debt sitting behind it.

02The math, step by step

You buy a $300,000 home with $60,000 down and a $240,000 mortgage, so you control an asset five times your cash. If the home rises 10% to $330,000, your $60,000 of equity becomes $90,000, a 50% gain on your money. If it falls 10%, half your money is gone. The house moved 10% in both cases. Leverage did the rest.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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