Leverage refers to the use of borrowed money to increase the potential return on an investment. It is the ability to control a large amount of money using a relatively small amount of capital. Leverage can be used in various forms of investing, such as stock trading, real estate, and even in everyday personal finances.
In stock trading, leverage is often achieved by borrowing money from a broker to buy more shares of stock than the investor could otherwise afford. This allows the investor to control a larger position in the market, which can result in larger potential gains, but also larger potential losses.
In real estate, leverage is often achieved by borrowing money to purchase property. This allows the investor to control a larger property than they could otherwise afford, and it can result in larger potential gains from rental income and appreciation.
In everyday personal finance, leverage can be achieved by borrowing money, such as taking out a loan to purchase a house, a car, or to finance an education. The idea behind leverage is that the potential return on the investment will be greater than the cost of borrowing.
Leverage can amplify returns, but it can also amplify losses. This means that leveraged investments can be more risky than unleveraged investments. It’s important to use leverage cautiously and to have a clear understanding of the risks involved. Additionally, it’s important to manage leverage by using risk management techniques such as stop-loss orders, and by not over leveraging.