In investment terms, what does "leverage" refer to?

Leverage in investment terms specifically refers to the practice of using borrowed funds to increase the size of an investment. This approach allows investors to amplify their potential returns on their investments. When an investor uses leverage, they are essentially borrowing money in order to invest more than they could with their own capital alone. For example, if an investor has $10,000 of their own money and decides to borrow an additional $20,000, they can invest a total of $30,000.

Utilizing leverage can enhance the overall gain on an investment if the value of the investment rises. However, it also introduces increased risk, as losses can be magnified equally if the investment does not perform well. Thus, understanding leverage is crucial for investors, as it can bear significant implications for both returns and risks when making investment decisions.