Thursday, May 23, 2024

Leverage Investing – Is it The Right Strategy for You

Over at Allymon, a particular strategy is utilized to produce great returns for some clients. So we at Allymonews decided we wanted to educate our readers and other potential investors about this strategy called Leverage.

The Basics of Leverage

Simply put, Leverage is the strategy of using borrowed money to increase return on investment(R.O.I.). The principle of leveraged investing is that higher ROI can be achieved by using debt facilities. Profits come from the difference between the borrowed capital investment returns and the associated interest cost. However, leveraged investing exposes an investor to higher risk as both enhanced profits and amplified losses are possible outcomes. Before using leverage, investors should consider several factors such as their investment horizon, risk tolerance level, market conditions and liquidity. As such, this strategy is better utilized by professionals.

Leverage Investing - Is it The Right Strategy for You

How does the leverage strategy work?

Leverage can be used in a variety of ways such as inverse and straight-forward and to varying degrees such as 2 times and 3 times multiplied by everyone from small, medium and large financial institutions, novice and professional traders to passive and active investors. Essentially, anyone who has access to borrowed capital to increase the returns on their investment in an asset is using leverage. A basic example is a prospective homeowner taking out a mortgage. By loaning money from a bank, they are essentially using leverage to buy an asset – in this case a house – which may increase in value over time. Central to this strategy is that debt and equity combined will always be greater than equity alone and what one can purchase using both will always be more substantial.

Investing with leverage options

The concept of leverage is used by both investors and companies, with the former using leverage to increase the returns that can be provided on an investment, and the latter using leverage to finance their assets. For investors, aside from direct borrowing, there are three primary strategies that can be utilized for leverage investing: margin trading, options trading, and leveraged ETF trading.

Margin trading uses borrowed money to purchase or sell short securities. This occurs in a “margin account,” a type of brokerage account in which your brokerage firm lends you cash (a “margin loan”), using the account as collateral, to purchase or sell shor