Leverage

Leverage

In simple terms investing should be a case of putting your own money into an asset in the hope it will grow and pay a return. But in the convoluted finance world, investing can also involve borrowing a sum of money, known as leverage, so you can invest more and increase the potential return.

A more tangible example of leverage is how it works in real estate.

You buy a house for $100,000 and you borrow $20,000 for the deposit. Your leverage is $80,000. The house price rises by 50% to $150,000. But your return is not 50%, it's 62.5%. This is because your $80,000 investment has increased by $50,000.

Of course if the market goes the other way, your losses are amplified as much as your gains. The wise rule for us mere mortal non-professional investors is don't invest until you have cleared your debts. But there's method in the madness for others.

 
 
Stocks

Stocks

Value investing

Value investing

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