What does 'leverage' mean in finance?

Leverage in finance refers to the use of borrowed capital to increase the potential return on investment. By taking on debt, an investor can amplify their purchasing power and invest more than they could with just their own funds. This can lead to higher returns if the investment performs well, as the profits from the investment will be larger compared to the initial outlay of personal capital.

However, leveraging also comes with increased risk, as losses can be amplified in the same manner. If the investment does not perform as expected, the obligation to repay the borrowed funds can create financial strain.

The other choices reflect different financial strategies. Investing personal funds exclusively denotes a risk-averse approach without leveraging, minimizing debt to lower risk emphasizes maintaining a conservative financial posture, and funding projects through savings only avoids any use of debt altogether. These alternatives do not encapsulate the essence of leveraging, which uniquely combines borrowing with the goal of enhancing returns.