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What is leverage ratio in stock trading?

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Publish Date: December 06th, 2019

By: Sandhya Kannan, Head – Content

In stock market jargon, leverage trading is using shares
that are borrowed from your broker to increase your position so that your credibility goes higher and you can make more money on the side.

What is leverage?

Leverage is a technical term that is used to indicate the results of using capital that is borrowed. For example, a funding source that you require at the time of investing to expand the business’s asset base. Subsequently, the idea is to generate returns on the risk capital.

Now leverage is channelised as a kind of investment strategy to use the money that is borrowed especially exercising a number of financial instruments or capital that is borrowed so that the potential return of an investment can be increased. Leverage can also mean the amount of the total debt that a firm generally uses to monetary assets. When someone says that a company, property or investment is highly leveraged, that usually means that the item or a company has less equity than debt.

How does leverage work?

Leverage is the usage of debt or borrowed capital so that an investment or project can be undertaken. The target or aim is to increase the potential profit from a project. At the same time, leverage will also increase the potential risk in case the investment does not see the desired outcome.

Leverage is something that both investors and companies use. Investors generally apply leverage to significantly increase the profit that can be used for another investment. They lure their investments by using various options that include measurement and margin accounts. Companies can also use leverage to promote an increase in their assets. In simple words, instead of creating stock to increase capital, companies can use their debt financing to invest in various operations as an attempt to increase the shareholder value.

In the end, let's look at what is leverage ratio.

Leverage ratio

So, a leverage ratio is any one of the various financial measurements that analyse how much money comes in the form of debt, loans or assesses the power of a company on the grounds of meeting its financial obligations.

The leverage ratio number is very important for companies that rely on a mixture of equity and debt to finance their operations. So, having a certain amount of debt held by a company is useful.