What does leverage mean in finance?

Leverage in finance refers to the purpose of asset growth by borrowing funds. That is to say, leverage effect is a financial means to increase investment income or accelerate repayment. The size of financial leverage effect is measured by the degree of financial leverage. Nowadays, many financial institutions will use leverage to improve their income, but at the same time they will also take risks.

There are many ways to use financial leverage, including loans, issuing bonds and issuing stocks. Compared with not using leverage, financial institutions that use financial leverage can obtain higher profit rate. However, there are risks in using leverage, because if the borrowed funds cannot be paid off in time, the risk of assets and liabilities may increase.

When using financial leverage, institutions need to pay attention to the balance sheet to ensure solvency. In addition, we should set reasonable leverage according to the market environment, control risks and ensure timely repayment of debts. The use of financial leverage needs to be cautious, and investors should understand relevant knowledge and risks.