Money makes money. The more money you have, combined with knowledge and a bit of talent, the more you can multiply it. Well, but how do you do it when you don’t have that money, you ask. That’s where financial leverage comes in. Using debt, which is a helping force here, you can achieve higher investment returns.
What is financial leverage?
Leverage generally is a tool that helps a person. It multiplies your strength so you can perform tasks that you would find difficult without this tool.
Financial leverage, which has the English name: leverage, is also a tool. A tool that helps you in the financial world. A tool that allows you to make far more money than you would be able to with your own funds. A tool that can get you into financial trouble.
It involves borrowing money from others for your trades, which increases your earnings. You pay interest for the loan. And just as this borrowed money can help you to a much larger profit, it can also get you into a much larger loss. Always work with money you can afford to lose. Use borrowed capital only if you are sure of what you are doing. Which, in the world of finance, which is accompanied by unexpected surprises, is sometimes difficult.
Do you have more free funds and don’t know what to do with them? Read our article 9 tips for saving and investing where you will find various options for where to put your money. You can also try investing in silver, which can become an interesting hobby.
Who uses financial leverage?
This tool is used not only by companies, but also by individuals operating in financial markets.
Are you a company
You have a company and increase your capital using a bank loan or by issuing bonds. You then use this capital to invest. If the return on new assets is higher than the interest on the loan, you make a profit. Furthermore, interest on loans is tax deductible. You can therefore reduce your profit, from which you will pay tax. This effect is called a tax shield. However, it is not good to over-indebt the company, it can threaten its financial stability.
Calculation for financial leverage
Financial leverage = total assets / equity
The financial leverage (FL) ratio shows the degree of indebtedness of your company. With a higher degree of indebtedness, your company will have difficulty obtaining further loans. Some banks may provide it to you, but at high fees.
Are you a skilled investor?
You want to use your talent and the information you have. To make more money from it than you are capable of. There are traders who use financial leverage to trade, buying and selling within minutes or seconds. In this case, a strong financial leverage can be used. However, if you want to hold shares overnight or even for more days, the trade may not be worth it. Interest on borrowed money increases and your final profit decreases.
Leverage rule
“The longer you want to keep your position open, the smaller the financial leverage should be.”
Leverage effect
The leverage effect allows you to trade in much larger volumes than you are capable of with your deposit alone. Leveraged trading is also called margin trading.
Leverage effect = size of the total transaction / required margin
Example of financial leverage
For a company, the current value of one share is 100 CZK (about 4.6 USD), you expect an increase. You have your own 1,000 CZK (about 46 USD). You buy shares and then sell them at a value of 120 CZK (about 5.5 USD).
- You only bought with your own money 1,000 CZK (about 46 USD). You bought a total of 10 shares. Sale for 1,200 CZK (about 55 USD). Total profit 200 CZK (about 9.2 USD).
- Your broker offers leverage. You choose a leverage of 1:20. Your 1,000 CZK (about 46 USD) multiplied by 20 equals 20,000 CZK (about 920 USD), the amount you can buy shares with thanks to leverage. You therefore buy a total of 200 shares, which you sell for 24,000 CZK (about 1,100 USD). Your total profit is 4,000 CZK (about 180 USD). Subtract interest from this to find your net profit.
To use leverage effectively, you need a strategy and financial literacy. It is important to know what you are doing and why you are doing it. Think carefully before using it, and never risk your emergency fund.
Do you have experience with leverage? Share your experiences with other readers in the comments below.
USD amounts are approximate, converted at the Czech National Bank rate of 21.80 CZK (about 1 USD) per USD on 2 October 2026.
