“Leverage” is one of the more interesting and difficult concepts to fully grasp in all of finance, but it’s important for anyone that borrows or plans to borrow money to understand. Much of the confusion stems from the contrasting meanings embedded in the same word. Merriam-Webster’s dictionary includes two very different definitions. The first suggests strength: “power, effectiveness.” The other, on face value, has little to do with control: “the use of credit to enhance one’s speculative capacity.” Combining the two suggests that the party which borrows has the leverage — they have the power and advantage over others. Does that mean that the borrower is dominant over the lender? Somehow, that flies in the face of what many of us learned at an early age. The gambler who can’t pay his bookie ends up with a right hook to the gut. Yet many people jump into risky financial situations without considering the potential consequences.
Understanding Financial Leverage
The key to borrowing effectively is to have a keen understanding of what might go wrong.
December 10, 2012
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Accelerate your career with Harvard ManageMentor®. HBR Learning’s online leadership training helps you hone your skills with courses like Finance Essentials. Earn badges to share on LinkedIn and your resume. Access more than 40 courses trusted by Fortune 500 companies.
Strengthen your fluency in financial statements.