Thursday, October 21, 2010

Leverage (in edit)

1. What is financial or investment leverage?

Leverage is attained when you borrow money to fund the ownership of something. For example, your house and its mortgage. You want to buy a $100,000 house but only have $25,000, so you borrow the rest of the money from the bank in the form of a mortgage. You are then able to pay the bank back the borrowed amount in monthly payments over time.

2. How am I leveraged?

Normally, the average person would set aside a portion of their income that they want to invest each month. They would use that money to reinvest in the same security, or pick a new one each month. To be leveraged, you would instead choose to borrow a large amount of money (called a margin) to invest immediately, and gradually pay off the amount with your portion of monthly income and returns on your investment. If your investment is highly successful, you can pay off the margin easily. If your investment fails, though, you will still have to pay off the margin.

3. How are companies leveraged?

A company can similarly be leveraged by borrowing money to finance operations without increasing company equity. The company would borrow money and use it to expand, increase production, or buy fixed assets to reduce their operations costs.



WARNING

Being leveraged can be very risky. There is potential for higher gains, but there is equal potential for higher losses. Always do strong analysis before investing, and always manage your risk according to your financial stability and preferences.

No comments:

Post a Comment