Today, let’s talk about leverage – why it can make you rich and why it can make you broke. What is leverage? Actually, leverage is just a term in investing, meaning that you borrow money from someone to invest. For example, let’s say I have $50, I can go and borrow money from my friend Mary, another $50. So now I have $100 and I use this to go and invest in something. And in the end, I get a profit of $50. So now when you look at it, the capital of $100 earned a profit of $50. That means it is a 50% return on investment. But actually, I only invested $50. So that means my $50 actually produced $50. So if I’m looking at my money only, my money earned 100%.
So that’s 100% return on my first investment. But, if on the contrary, I lost all this money – my $50 and my friend Mary’s $50 – they’re all gone. So that means, not only did I lose my money, I also lost my friend’s money. And if I don’t have that money to pay her back, I’m pretty much broke and become in debt. For most experienced investors, they already know what leverage is – they’re familiar with the term. But for most of us, we may not really know what leverage is.
But actually, we are closer to the term than we thought. Because if you are a homeowner, you already leveraged your money because you may put in 20% of your down payment into this home. But then, the bank could give you another 80% in order to buy your home. So let’s say, my house costs $100,000. I may have only $20,000 to put in as a down payment and I turn around and borrow from the bank another $80,000. So now my $20,000 actually gave me the power to own a property worth $100,000. This is what it means by “I’ve already leveraged my money.”
The other assets that we are familiar with, like stocks, can also be leveraged by borrowing money from our broker to invest as well. And the other asset class that by its nature is a leverage-type of asset is also there – something like option, forex and future — which I will talk more about in the future. I hope that this short video gave you some understanding of what leverage really means and how you can use leveraging power to increase your return on investment.
But whatever you do, give yourself education and knowledge to understand it fully before you jump into investment or anything in life. Stay safe, prepare your risk management before you jump into something new. I hope this helps. And if you like the video, please help me click “like”, share, and subscribe. Have a great and beautiful day! See you next time!