When a business borrows money so it can reinvest it in hopes of getting a higher return, it's called leverage. Using loaned money, the company can make larger investments, and, therefore, receive larger returns. At least, that's the theory. However, along with leverage comes risk, because it not only magnifies the potential profit, but the potential loss as well.

Here¿s how it could work. Say a company has $10 million in the bank. It can leverage itself by borrowing another $20 million. Now that company has $30 million to play with, and, if it plays its cards right, the return on its investment will outpace the interest it has to pay on its debt.

Therein, lurks the risk. If the company's investments don't bring in enough money to pay the debt and principal and then some, it's stuck with debt that far exceeds its assets. Not good. A company's leverage can be measured by its debt to equity ratio. The more debt a company has compared to its equity, the more leveraged (and vulnerable to bankruptcy) it's considered.

Companies aren't the only ones affected by leverage. When you buy stocks on margin, borrowing extra money from your broker to invest in more stocks than you could have on your own, you¿re using leverage. Again, the larger investment might mean more profits when you sell, but there's also a risk that you'll lose money and you'll lose a lot more than if you had used your own funds to invest.