How is 'financial leverage' defined?

Financial leverage refers to the use of borrowed funds to amplify the potential returns on an investment. This strategy allows investors or companies to invest more capital than they currently have, which can lead to higher profits if the investments perform well. By borrowing money, they can take advantage of more significant investment opportunities that they otherwise couldn't afford, with the expectation that the returns on the investments will exceed the cost of borrowing. This approach can magnify both gains and losses, making it a powerful tool for enhancing returns when used judiciously.

In contrast, saving money is more about accumulating funds without necessarily employing leverage, while purchasing insurance focuses on risk management rather than investment enhancement. Selling assets to reduce debt might reflect financial restructuring but does not involve leveraging funds for investment. Thus, the correct definition of financial leverage captures its essence as a means of using borrowed capital to pursue greater investment opportunities.