In finance, what does leverage refer to?

Leverage in finance typically refers to the strategy of using borrowed funds to enhance potential returns on investment. By utilizing loans or other forms of debt, investors can increase their investment capacity beyond what they could achieve with their available capital alone. This approach allows for the possibility of magnifying gains if the investments perform well. For instance, if an investor uses leverage to purchase more stock, any increase in the stock price could lead to significantly higher profits compared to investing solely with their own equity.

The other choices provided do not accurately represent the concept of leverage. Utilizing current assets to pay off current liabilities refers to liquidity management rather than leverage. Investing in low-risk government bonds is a conservative strategy and does not inherently involve the use of debt. Lastly, the strategy of selling high and buying low is associated with trading principles and market timing, which does not define leverage in a financial context. Thus, leveraging is specifically tied to the use of debt to amplify investment outcomes.