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Leverage (finance)

📈 Economics By CampusDown Wiki Editorial Team Last updated
Leverage uses borrowed money or fixed costs to magnify returns — and losses.
Contents
  1. 1. Overview
  2. 2. Frequently asked questions
  3. 3. References

Overview

Leverage means using debt to raise the return on equity: with half the purchase borrowed, a 10% price move becomes roughly a 20% gain or loss on equity. Financial leverage comes from fixed interest costs, operating leverage from fixed operating costs, and the product is combined leverage; Modigliani–Miller and capital structure theory analyse it. Leveraged ETFs target a multiple of *daily* returns, so long-run results can diverge. Risks include margin calls, rising interest costs and system-wide deleveraging (Geanakoplos, 2010).

Frequently asked questions

Is leverage always good?
No — it magnifies losses too.

References

  1. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48(3), 261–297.
  2. Brealey, R. A., Myers, S. C., & Allen, F. Principles of Corporate Finance. McGraw-Hill.
  3. Geanakoplos, J. (2010). The leverage cycle. NBER Macroeconomics Annual, 24, 1–66.

Reports and materials that use this theory (Korean)

There are no materials dedicated to this theory yet, but you can search related reports in the CampusDown library (Korean).

Find more reports · Search '레버리지' on CampusDown →
Capital Structure TheoryCapital structure theory explained: how firms choose between debt and equity, from Modigliani-Miller irrelevance to the trade-off theory, the pecking order theory, agency costs and market timing.💼 BusinessModigliani-Miller Theorem (MM Theory)The Modigliani-Miller theorem explained: the 1958 irrelevance proposition, Proposition II on the cost of equity, the 1963 corporate tax correction, its assumptions and why it remains the benchmark of corporate finance.📈 EconomicsBehavioral FinanceBehavioral finance explained: how psychology and cognitive biases shape investment decisions and prices. Covers Kahneman and Tversky's prospect theory, loss aversion, overconfidence, the disposition effect, herding and limits to arbitrage.📈 EconomicsSunk Cost and the Sunk Cost FallacySunk cost explained: why unrecoverable past costs should not affect decisions, the sunk cost (Concorde) fallacy, Arkes and Blumer's experiment, escalation of commitment, and how to avoid it in investing and career choices.📈 Economics

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This article was last updated on October 24, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.