Expert: Doug Ingram - 10/27/2009

Question
What is meant by financial leverage. Explain me in lay man's language

Answer
The simplest form would be buying stocks on margin.  That allows you to control $20,000 worth of stocks with only $10,000 in you account.  That's 2 to 1.
Into the 1929 US crash, investors could use 10 to 1.  So, if your stocks lost 10%, you lost all your money.
Other financial products like futures still allow more than 2 to 1.

Banks have capital of 5 to 10% that they can use to attract deposits and make loans.  So they are leveraging 10 to 20%.

Many large banks had capital of only 2 to 3%.  They were leveraged 30 times or more.  When property values went down, they went bankrupt.

Financial leverage is anytime you control more investments than you could pay for if they went to zero.