In finance, what does leveraging refer to?

Leveraging in finance refers to the practice of using borrowed funds to increase the potential return on investment. This strategy allows investors to purchase more assets than they could with their own capital alone. By utilizing debt, an investor can amplify their returns when the investment performs well since the gains from the investment exceed the cost of borrowing.

For example, if an investor borrows money to invest in real estate and the property appreciates significantly, the returns on the total investment will be greater than if the investor had only used their own equity. However, it’s important to note that while leveraging can enhance returns, it also increases the risk, as losses can also be magnified if the investments decrease in value.

The other options presented do not accurately capture the essence of leveraging; using only equity to finance investments does not involve borrowing, reducing debt generally pertains to improving financial health rather than increasing investment potential, and investing solely in low-risk securities does not imply any use of leverage, as it typically involves conservative, safer strategies.