What does the concept of leverage represent in financial markets?

Leverage in financial markets refers to the practice of using borrowed funds to amplify the potential return on an investment. It allows investors to increase the amount of capital they can invest beyond their own resources, thus magnifying the impact of both gains and losses. When an investor uses leverage, they are essentially utilizing debt to finance more significant investments in hopes that the returns exceed the cost of borrowing.

For example, if an investor puts in $10,000 of their own money and borrows an additional $40,000, their total investment becomes $50,000. If their investment appreciates by 10%, they make $5,000 in profit. However, if they had only invested their own $10,000 without borrowing, a 10% return would yield only $1,000. While leverage can enhance profits, it also increases the risk of losses, creating a more volatile investment profile.

In contrast to the other options, which either describe more conservative investment strategies or involve using personal savings without borrowing, the correct concept of leverage directly involves the use of debt to potentially increase returns and also entails higher risk.