Quick pick:
Finance leverage is borrowing the money to increase the profit in the investment asset, which those leverage is taken to double or triple the reward to invested return.
But at the same time, it occupied double to triple risk of losing the money when the investment return fails to reaped, so always make sure that your investment risk with leverage had better return than your investment.
Various use of financial leverage:
Supposed if the financial amount of investment doesn’t had any part of borrowing for the investing, it couldn’t be considered as financial leverage. However this leverage for finance would takes in various manner with distinct kind of purpose, one is in the real estate, stocks, lending loans extra….
When comes to use financial leverage on the real estate, the mortgage borrower borrow the money from the banks with some down payment to own the home or apartment that exist their investing amount.
Which this exists amount from the investment are considered as leverage in the real estate investment. Next the Stock traders who looking to take the reward more than three or even thousands times more than the real principal investing amount are also borrow from the stock brokers to extend their reward.
But this leverage of 100 to 1000 times of financial leverage occupied the higher than 2 or 3 times more risk than any other real estate leverage risk. So always make sure that your affordable to loss those investing principal and borrowed capital.
Then the third things would be financial leverage for the business would be borrow money to expand or increase the business activities towards the future with minimum principal value of the industry.
Clearly the leverage use in all the aspects of the investment with strong fundamental reason of growth the made Investment more efficiently than any other.
3 step to calculate financial leverage
1. invested amount (IA)
2. Borrowed capital (BC)
3. IA-BC
Each and every financial leverage would be diagnosed by these three steps. What is the total investment amount that made for the project or business, then what is the part of borrowed capital in made investment. Then finally use those two elements and subtract the invested amount and borrowed capital to arrive the leverage of financial amount.
Assume that you had 12,000 dollars in the investment account to invest in the forex market currencies, and you looking to increase the reward hundreds times using the leverage in the forex market.
This leads to $1200 investment into 1200×100 = 120,000 dollars. But when the market started goes on opposite side that you couldn’t lose your 100 times leverage more amount despite you would lose the 1200 dollars hundreds times faster than What you lose with no leverage trade.
At the same time, when your affordable to lose those 1200 dollars without highly considering about the huge risk, if the Market goes in your favour that produce you ultimate reward that you would reap the return 100 times more with comparison to no financial leverage trade.
Most of the people’s confuse the financial leverage and margin, so lets jump into know the key differences in it anyway.
3. Financial leverage vs Margin
Margin is end and start line in the trading market, which those line doesn’t had any relation to the leverage, but the leverage used over the margin to calculate and double or more than a triple the risk.
Financial leverage is became the choice for the margin of the trade to expend the profits using the advantage of debts. This financial leverage and margin are Play a major role in risk and profits in the stock market.
4. What is good financial leverage?
Their is no specific fixed good ratio of financial leverage, based on your cash flow that reduce the risk of leverage debt shows that you had a good financial leverage.
Imagine that you had purchased 12 millions dollars apartment with borrowed debt of 10 million and down payment of 2 million. These leads you to pay off those loan each month 12,000 dollars.
Take that your apartment produce 20,000 dollars per term cash flow, that helps to pay off each term debt and left you with 8 thousands dollars in hand.
In this scenario if we take that this financial leverage is good, because that your cash flow cover the payment of your debt and interest rate, so here it always a plus sign that you could able to increase your reward by using the financial leverage as a advantage.
Market rule: #100717
Taking a financial leverage is not a market rules that imposed for all the investors, it is choice were you would use if you want to increase the return and net worth of the investment more than ordinary.
Using this kind of leverage also had huge loss, your completely responsible for any action your taking using the financial leverage.
If your not comfortable or align to use this content with based on market rules please learn about how to regulate your investments under your control with use of Rule investing.