Markets · 6 pages · 12 min
How leverage multiplies both ways
Borrowed funding makes equity rise faster when assets rise and fall faster when assets fall.
When the purchase is complete, return to the original window. It will refresh.
From the opening
Leverage means assets are funded partly by liabilities, so a change in asset value lands on a smaller equity base. Because assets equal liabilities plus equity, a gain or a loss on the assets changes equity by the whole amount while equity was only the residual slice. The opening covers debt funds part of the assets, gains land on thinner equity, and losses hit equity first.
The rest of the brief — the later sections and the reading notes — opens after Stripe confirms payment.
Inside
- Debt funds part of the assets
- Gains land on thinner equity
- Losses hit equity first
- The ratio works downward too
- Where the idea stops applying
- A distinction worth keeping
Sources
- Leverage and residual equity claims
- Balance-sheet identity under borrowing