leverage

Leverage is the act of controlling an asset with capital smaller than the value of the asset. An example of leverage is purchasing a real estate with mortgage. If the buyer puts $20,000 down payment toward home purchase and the total price of the property is $200,000, the buyer effectively controls an asset with market value of $200,000 with only 10% investment. If the price of the property increases to $220,000 for one year, the home owner would have made 100% return on his initial capital investment of $20,000. The lower the capital invested compared to the asset value, the higher the leverage and vice versa.