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Leverage is a financial term used to describe the process of using borrowed funds or financial capital and investing in a way which will dramatically increase the potential return on investment. The most basic way of explaining it is simply that you are borrowing money to achieve your investment goals. Some simple examples include, mortgages – you’ve borrowed money to achieve your goals as a home owner, or Student Loans – you’ve again, borrowed money to achieve your education goals.
How does Leverage work?
Traditional investing is simpler and usually requires saving a portion of your income to invest each month or year and this can take some time and usually your assets or investments grow over time. Leveraged investments work a little differently. When you use leverage you usually take out a large loan and invest a large amount in one single investment and then with your monthly income you pay back the loan
. Your payback amounts are usually the same as you would set aside for traditional investing but with leveraged investing you can usually expect much larger returns.
It usually works in stages; the first stage is obviously the investment which with leveraged investing is higher than traditional investing. The second stage is where your investment grows and with leveraged investing this is usually much faster because of interest rates on large amounts etc. and then the third stage is where you see the value before you repay taxes and loans. Then the fourth and final stage is the return on investment which is deducted from the amount payable – for example, you pay back the loan amount and you are left with your return.
Leverage is a great way to invest and is known to be much more lucrative than traditional investing.
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