Borrowed Capital

AAA

DEFINITION of 'Borrowed Capital'

Funds borrowed from either individuals or institutions. Borrowed capital can be used in a number of ways. Investors use borrowed capital to increase their potential investment returns; this use is known as leverage. The upside of investing with borrowed capital is the potential for greater percentage gains; the downside is the potential loss of someone else's money, which must then be repaid. Another way borrowed capital can be used is by businesses as a loan or debenture.

Also referred to as "loan capital."

INVESTOPEDIA EXPLAINS 'Borrowed Capital'

Investors commonly use borrowed capital when trading in the forex markets. Critics consider this leveraged trading to be dangerous, while proponents argue that with the proper precautions, such as the placing of stops, investors can achieve their goals faster without taking on too much risk.

People who take out a mortgage to buy a home are also using borrowed capital. In this case, the purpose of borrowing capital is not necessarily to improve potential investment returns, but to make it possible to purchase an expensive asset that is difficult to pay for in one lump sum.

RELATED TERMS
  1. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  2. Margin Account

    A brokerage account in which the broker lends the customer cash ...
  3. Remargining

    The process of bringing an account up to minimum equity standards ...
  4. Broker's Call

    The interest rate charged by banks on loans made to broker-dealers, ...
  5. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  6. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company ...
RELATED FAQS
  1. What's the difference between the coverage ratio and the levered free cash flow to ...

    Coverage ratios focus on a company’s ability to manage its debt, while the levered free cash flow to enterprise value ratio ... Read Full Answer >>
  2. What are the different sources of business risk?

    A certain risk level is inherent in running a business. A company cannot completely eliminate risk, but it can control or ... Read Full Answer >>
  3. How does DuPont Analysis measure financial leverage?

    DuPont analysis uses something called the "equity multiplier" to measure financial leverage. The equity multiplier is calculated ... Read Full Answer >>
  4. How does additional equity financing affect existing shareholders?

    Additional equity financing dilutes existing shareholders. There are two types of candidates for equity financing. One is ... Read Full Answer >>
  5. What is the equity multiplier's affect on Return on Equity (ROE)?

    In the three-step DuPont analysis model, the equity multiplier is one of the three components of return on equity (ROE), ... Read Full Answer >>
  6. How do I calculate the degree of operating leverage?

    The degree of operating leverage is a measure used to evaluate how a company's operating income changes with respect to a ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  2. Insurance

    Working Capital Works

    A company's efficiency, financial strength and cash-flow health show in its management of working capital.
  3. Options & Futures

    Find Quality Investments With ROIC

    Return on invested capital is a great way to measure the true value produced by a company. Learn to use the ROIC metric and increase your chances of finding successful investments.
  4. Options & Futures

    Getting The Real Earnings

    EPS helps investors analyze earnings in relation to changes in new-share capital.
  5. Options & Futures

    Borrowing Smart In A Debt-Filled World

    Leveraging your money can have many perks, but it's not always the smartest financial plan.
  6. Brokers

    Private Equity's Returns Are Tempered By Its Risks

    Private equity firms adopt approaches to quickly hike up earnings and boost returns, but these investments come with big risks too.
  7. Credit & Loans

    The Pros & Cons Of Personal Loans vs. Credit Cards

    One is not like the other. We help you decide where to borrow money from.
  8. Fundamental Analysis

    What is Gearing?

    Gearing, also called leverage, is the degree to which a company’s operations are funded by lenders versus shareholders.
  9. Stock Analysis

    Is Prospect Capital Exposed To Elevated Losses?

    According to a federal government report, the quality of leveraged loans has begun to deteriorate. Prospect Capital specializes in these types of loans.
  10. Mutual Funds & ETFs

    Buying ETFs on Margin Versus Leveraged ETFs

    Leveraged ETFs and investing in an ETF on margin both have their advantages and disadvantages.

You May Also Like

Hot Definitions
  1. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  2. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  3. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  4. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  5. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
Trading Center