# What is Leverage?

What would you consider leverage? I know this may sound like a basic question but I have spoken with several industry professionals with a significant amount of experience and all of them have a different definition of leverage.

There are some that consider collateralized financing and investing in a low risk investment as not leverage. Collateralized financing being borrowing by "lending securities", reverse repo, etc., where one essentially has "pledged" assets to borrow money. And "low risk" investments being money market, commercial paper, treasury bills, etc.

It seems to me like this is still leverage, albeit low risk leverage but nevertheless leverage. Should this type of leverage be considered utilization of leverage limits that are defined as a % of capital/assets? Would love to hear various opinions, justification, and theories by various investment professionals. Examples would be appreciated.

• Any feature meant to increase the transaction's risk, other than brute force increase of the notional, sounds like a kind of leverage to me. For example, suppose you own a condo, and you decide to rent it out via Airbnb while you travel. You hope and expect your revenue to exceed the cost of Airbnb listing, and of low-probability disasters. Are you leveraging here? To me, yes. Does this leverage fit into limits frameworks specifically designed for other kinds of leverage? I wouldn't count on it. Apr 9 at 14:59
• I consider any borrowing to be leverage. And the fact an investment is levered itself creates risk because if you don't have term financing, you can be forced to sell. Apr 9 at 16:12
• @user42108 Thank you for your comment. I agree that borrowing is leverage. There are other forms of leverage--like futures, forwards, total return swaps. In my OP, the person I spoke with did not consider this leverage because the investment was similar to the liability. I have heard some argue that high beta is leverage. Apr 9 at 19:43
• "the investment was similar to the liability" - I disagree with this though perhaps I misunderstand the quote..? If you trade a futures contract, putting up the margin required by your FCM, the "investment" is arguably the margin but that's not the liability. Apr 11 at 16:12
• let me try this generic definition: as soon as you get the returns of a security $A$ for less that its facial value in the same numeraire, you get leverage. Apr 12 at 3:45