{"id":37651,"date":"2016-11-28T11:06:41","date_gmt":"2016-11-28T05:36:41","guid":{"rendered":"https:\/\/staging-imarticus.kinsta.cloud\/?p=37651"},"modified":"2026-05-15T14:17:07","modified_gmt":"2026-05-15T08:47:07","slug":"understanding-financial-leverage-physics-way","status":"publish","type":"post","link":"https:\/\/imarticus.org\/blog\/understanding-financial-leverage-physics-way\/","title":{"rendered":"Understanding Financial Leverage the Physics Way!"},"content":{"rendered":"<p>We have often heard of Leverage in various Financial contexts such as a Leveraged Buyout, Leverage ratio of a Hedge fund etc. What does it mean?<br \/>\nLets get to Physics first, for it is more common-sensical and straightforward<br \/>\nWe define Torque as the radios vector multiplied by the force vector.<br \/>\nThis finds application in as mundane a thing as opening a door.<br \/>\nThe force we apply is of course the FORCE =F and the distance between the knob and the axis about which the door rotates is the RADIUS =R.<br \/>\nImagine for a moment if the knob were to be fixed or engineered to be operated from the middle of the door instead of the end as we conventionally have it. This would mean that we would require more force for the same output. The output here being the door being opened. Say 45 degrees.<br \/>\nIn the Financial scheme of things, the force that we apply is the monetary effort coming from ownership.i.e, say equity. The inherent radius is analogous to the inherent effortlessness involved of not having to \u2018own\u2019 or in other words, not having to raise equity but debt. The torque here could be considered as the revenue\/profit\/return<br \/>\nThis situation of having more debt than equity is akin to having more radius and the knob of the door hence being attached to the end of the door. This makes the door opening rather relatively effortless.Or gaining profit effortlessly or by leverage.<br \/>\nSo does that mean that a high leverage or debt is always the go-to choice of investment? I am afraid NOT necessarily.<br \/>\nImagine the flip side of the door story. If someone were to have kept the hand at the edge of the door, while it is being closed .A given amount of force (equity) will definitely do more harm to the innocent hand when the radius is more (debt) than it would if the radius were less due to the door knob located unconventionally in the middle.<br \/>\nNeedless to say financially it could go as far as saying \u201cHe burnt his fingers venturing into the business\u201d!<br \/>\n<a href=\"https:\/\/imarticus.org\/\">Imarticus Learning<\/a> offers short term courses in finance that not only train students to become investment bankers, or learn to manage their own finances via <a href=\"https:\/\/imarticus.org\/banking-and-wealth-management-bootcamp\/\">wealth management courses<\/a>. Imarticus Learning is a leading industry expert trainer in financial services.<\/p>\n<p><iframe loading=\"lazy\" src=\"https:\/\/www.youtube.com\/embed\/_y1QGrU39Ws\" width=\"560\" height=\"315\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p><strong>Author Bio :<br \/>\n<\/strong>Kumar Simha is an NIT Graduate with an MBA, Finance from HULT, Boston, USA, Kumar has more than 8 years of experience across Financial services, Business management and Training.<\/p>\n<hr \/>\n<p style=\"text-align: left;\">\n","protected":false},"excerpt":{"rendered":"<p>We have often heard of Leverage in various Financial contexts such as a Leveraged Buyout, Leverage ratio of a Hedge fund etc. What does it mean? Lets get to Physics first, for it is more common-sensical and straightforward We define Torque as the radios vector multiplied by the force vector. This finds application in as [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":260355,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_mo_disable_npp":"","_lmt_disableupdate":"no","_lmt_disable":"","footnotes":""},"categories":[22],"tags":[142,152,212,217,229,450,451,455,456],"class_list":["post-37651","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-online-finance-courses","tag-investment-banking-courses","tag-financial-courses-in-india","tag-certification-courses-in-finance","tag-finance-courses-in-india","tag-finance-courses","tag-finance-courses-online","tag-investment-banking-institute","tag-investment-banking-training"],"acf":{"youtube-url-id":"","publised_date":"","ls_key":"CIBOP"},"aioseo_notices":[],"aioseo_head":"\n\t\t<!-- All in One SEO 4.9.9 - aioseo.com -->\n\t<meta name=\"description\" content=\"We have often heard of Leverage in various Financial contexts such as a Leveraged Buyout, Leverage ratio of a Hedge fund etc. What does it mean? 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