Leverage Stock Market

Leverage is using borrowed money to purchase a larger amount of an investment for the same amount of cash. Using leverage is common in real estate investing, but stock market investors can also use leverage to boost their returns. In the stock market the use of leverage is called buying on the margin. An investor who has money or investments in a margin account is allowed to borrow money from the broker to pay for a portion of the cost of stocks. According to Stock Tips, Buying stock on the margin with leverage can increase the potential gains of the investment.

A leveraged buyout (or LBO, or highly-leveraged transaction (HLT), or "bootstrap" transaction) occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company are used as collateral for the borrowed capital, sometimes with assets of the acquiring company. Typically, leveraged buyout uses a combination of various debt instruments from bank and debt capital markets. The bonds or other paper issued for leveraged buyouts are commonly considered not to be investment grade because of the significant risks involved.

Leveraging into equities with far higher long term growth, good liquidity and diversification – and where the interest is tax deductible – is obviously a far better strategy. Operating leverage is the degree to which fixed costs exist in a company's cost structure. Generally speaking, operating leverage is fixed costs divided by total costs. Operating leverage is important to the investment community because it is an indicator of the quality of earnings of a firm.