Leverage increases the potential return to a firm's shareholders,but also reduces the risk of their investment because shareholders have contributed less capital.

Leverage

The use of borrowed funds or other financial instruments to increase the potential return of an investment.

Potential Return

The expected gain or loss from an investment, taking into consideration both the risk and the expected rate of return.

Shareholders

Shareholders are individuals or entities that own shares of stock in a corporation, giving them partial ownership and possibly rights to dividends and a say in company matters.