What does financial leverage aim to achieve?

Financial leverage refers to the use of borrowed funds to amplify potential returns on investment. By utilizing debt to finance investments, a company or investor can hold a larger position than what could be afforded using only equity. This heightened exposure to an asset can lead to greater profits if the investment performs well, hence increasing the potential return on investment.

When leverage is applied effectively, even a slight increase in the value of the underlying assets can result in a disproportionately large increase in profits. However, this dynamic also introduces a greater risk, as losses can similarly be magnified if the investment underperforms. Consequently, while financial leverage is a tool aimed primarily at increasing potential returns, it also brings with it an inherent increase in risk, which is crucial for investors to understand when considering leveraged investment strategies.