Securities Trader Representative (Series 57) Practice Exam

Financial leverage refers to the practice of using borrowed capital to increase the potential return on an investment. By utilizing debt, an investor can enhance their purchasing power, allowing them to buy more assets than they could solely with their personal funds. This approach can magnify returns if the investment performs well, as the profits generated can significantly outweigh the cost of borrowing.

However, it is important to note that while financial leverage can increase potential returns, it also comes with increased risk. If the investment does not perform as expected, losses can be amplified as well, since the investor is still responsible for repaying the borrowed funds.

The other options focus on different financial strategies or practices. Investing solely with personal funds does not involve any leverage, while reducing financial exposure refers to risk management rather than leveraging debt for growth. Maintaining cash reserves for emergencies reflects prudent financial planning but is unrelated to the concept of leveraging investments for increased returns.