South Florida Arbitration & Litigation Lawyer Blog
Leverage Abuse, Exploitation and Manipulation – South Florida State and Federal Fraud, Misrepresentation and Breach of Contract Attorney:
Leverage may be used in a number of circumstances. In the business arena, three common uses, of leverage, relate to investments, financial leverage and operating leverage.
Investment Leverage (also known as margin) uses the equity in your brokerage account as a means of attempting to enhance the return on your equity without increasing your investment capital. Using margin, as part of your investment strategy, carries with it a number of risks, which you should fully understand before putting this strategy into effect. Both the Federal Reserve and brokerage firms have a number of rules that regulate the use of margin. Some key phrases are “initial margin,” “maintenance margin,” “house call,” and “Reg. T. Call.”
Operating Leverage relates to the extent to which a company’s costs of operating are fixed (rent, insurance, executive salaries) as opposed to variable (materials, direct labor. In a totally automated company, whose costs are virtually all fixed, every dollar of increased in sales is a dollar of increase in operating income once the breakeven point has been reached. In contract, a company whose costs are largely variable would show relatively little increase in operating income when production and sales increased because a small change in sales has a magnified percentage effect on operating income and losses. The degree of operating leverage measures the sensitivity of a firm’s profits to changes in sales volume.
Financial leverage reflects a company’s debt in relation to its equity in the firm’s capital structure. It measures the company’s long-term debt, preferred stocks, and shareholders’ equity measured by the company’s debt-to-equity ratio. The more long-term debt there is, the greater the financial leverage.
Please keep in mind that the above information is being provided for educational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. If the reader has any questions concerning the contents of this post, you should contact a qualified professional.
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