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Well, even if you can’t, you’re not alone in not fully understanding the meaning of all the financial terms currently in circulation. To help, Compass is launching a new series to explain frequently misunderstood investment terms. From time to time, we’ll take a financial term and demystify its meaning.

So, back to deleveraging. What is it?

Simply put, deleveraging is the unwinding of debt. In the business world, companies seeking to grow often take on large amounts of debt, or leverage, enabling them to spend more in order to achieve that growth. But debt is risky business. If the risk becomes too great for the company to bear or the growth attempt fails and the company cannot repay its debts – something which could be disastrous for its reputation - it’s stuck in a pretty sticky situation. Where is that money going to come from?

The answer is deleveraging – winding down debt by selling it off or by selling off some of the company’s unattractive assets at a hugely discounted price to raise the money. It is always the garish sweaters which feature heavily in the end of season clothes sales.  But some bargain hunters will buy them in the end if the discount is deep enough. This is what companies hope to achieve. They may not make as much as they had expected to, but at least they’ll make something, as long as they can find the right buyers.

Which leads to the next problem. Deleveraging is frequently seen by investors as a red flag, a signal that perhaps they shouldn’t put their money into that company but rather take it elsewhere. But where? This is where the world finds itself today, but this time it is households and financial entities who are in debt, all trying to recoup their losses by deleveraging, but in doing so, looking less and less attractive to investors and creditors. And the result? A lot of desperate sellers but hardly any buyers – a situation which can lead to decline in activity across the economy, more commonly known as a recession. But we’ll cover that next time.