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What is financial leverage?
1. What is financial leverage?

What is financial leverage?

Second, what is financial leverage?

Financial leverage is simply a multiplication symbol (). With this tool, the investment results can be amplified, regardless of whether the final result is profit or loss, it will increase at a fixed ratio. Therefore, before using this tool, investors must carefully analyze the income expectations and possible risks in investment projects. In fact, the safest way is to reduce the income expectation as much as possible and expand the risk expectation as much as possible, so that the investment decision-making results will inevitably fall within your expectations. When using financial leverage, cash flow expenditure may increase, which must be taken into account. Otherwise, once the capital chain breaks, even if the final result can be huge profits, it must face the end of early withdrawal.

Three types of financial leverage:

1. Enterprise type: an enterprise borrows money from financial institutions such as banks with credit or assets as collateral to expand reproduction.

2. Financial management type: under the structured financing mode, priority funds are used as guarantees to give priority to compensating future loss risks. After the priority funds are exceeded, the inferior funds will bear the losses, and the priority funds will bear more risks and benefits than the inferior funds, thus integrating the inferior funds with less risks into financial institutions such as banks.

3. Types of residents: Residents borrow funds from banks and other institutions through credit, asset mortgage or mortgage to purchase consumer goods, services and real estate.

Third, what is leverage in finance?

Financial leverage is just a multiplication symbol. With this tool, the result of investment can be amplified, and whether the final result is profit or loss, it will increase in a fixed proportion. Therefore, before using this tool, we must carefully analyze the income expectation and possible risks in investment projects.

In addition, it must be noted that when using financial leverage tools, cash flow expenditure may increase, otherwise once the capital chain breaks, even if the final result may be huge gains, investors must be out early.

Leverage ratio is the ratio of risk to assets on a company's balance sheet. Leverage ratio is an index to measure the debt risk of a company, which reflects the repayment ability of the company from the side. Generally speaking, the leverage ratio of investment banks is relatively high. In 2007, the leverage ratio of Merrill Lynch was 28 times and that of Morgan Stanley was 33 times.

4. What is financial leverage?

Leverage in finance refers to liabilities. The higher the leverage, the greater the business risk. If an enterprise does not borrow money, but operates with the owner's own money, then his leverage is zero. For example, to buy a standard futures contract, the face value is 10000 yuan, and the required margin is 1000 yuan. Theoretically, an investor needs 10000 yuan to prepare for contract delivery, but if he is a speculator and is very accurate about the trend, he can buy nine contracts with the extra 9000 yuan. It is equivalent to using 1 10,000 yuan to pry the futures contract of110,000 yuan. The amplification effect of this small stroke is called leverage. With 1 times capital leverage 10 times assets, the leverage ratio here is 10.