Therefore, if the company wants to invest in additional business operations, but not use its equity, it can use debt financing to extend its assets. That company may want to utilize its funds for operating costs. Let’s assume a company’s equity is $6 million. Essentially, instead of issuing stock to raise capital to fund certain business operations, a company can use debt financing to increase shareholder value. If an investor wants to take on a project or an investment, they may use debt to purchase this investment. If the investment results in a loss that exceeds the income from the asset or the value of the asset plummets, an investor could find themselves in a troublesome financial situation. While leveraging assets has the potential to heavily increase your returns, it can similarly multiply your losses. Just like many other strategies, leveraging investments comes with risk. Investors use this strategy in an effort to multiply their gains and, in turn, grow their overall asset base. More specifically, an investor will borrow money as a funding source instead of using their own equity. Leverage is an investment strategy that uses borrowed capital to increase the potential returns of an investment. If you have further questions, meet with a financial advisor in your area. The expectation is that the profit from the endeavor will exceed the risk and cost of taking on additional debt. However, applying leverage to your investment strategy comes with pros and cons. Commonly used by investors and companies alike, leverage is a technique that utilizes debt instead of equity to buy an asset. Leverage is a common financial concept you may often hear in reference to maximizing investor returns.
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