Importance of Leverage

The article touches upon the issue of Importance of Leverage. In order to grow your wealth you are going to need to invest your money. There are a lot of different options when it comes to investing but in order to really grow your wealth you need to choose the opportunities that offer a large enough reward. Unfortunately in order to get this kind of return you are going to have to increase your risk.

Importance of Leverage

One way that you can do this is through the use of leverage. Leverage has gotten a bad rap in the investment world because when it is misused it can get you into real trouble. However if you use it correctly it can be a great way to increase your net worth.

Leverage is simply the process of borrowing money in order to make an investment. The reason that you would want to do this is because your can potentially earn more money on your investment by using leverage.

For example if you had a thousand dollars to invest and you could use ten percent leverage you could actually get the equivalent of ten thousand dollar investment. Obviously that would greatly increase the amount of money that you could make. Of course the opposite is true as well you could lose more money if you lose leverage as well. That is why it is important to understand what leverage is and what the risks of using it are.

Most of us think of leverage as being something that applies to professional investors trading futures and options but the most common use of leverage is something we are all familiar with. When we take out a mortgage to buy a house we are actually using leverage. A mortgage is a loan that allows you to make an investment in this case a house. This is why leverage is so important used correctly it can help use to achieve financial goals that otherwise wouldn’t be possible.

There can be considerable risk involved in using leverage so it is critical that you understand it. That being said as the mortgage example makes clear leverage doesn’t necessarily mean a risky investment. Few people would consider buying a house to be a risky investment. As long as you use it correctly leverage can be a great tool and help you to grow your wealth in ways that wouldn’t be possible otherwise.

The most important thing when it comes to leverage is being able to assess risk properly. Risk management is an important aspect of any investment strategy and this is especially the case if you are using leverage. When they use leverage people often underestimate just how much risk they are actually taking. This is what gets them into trouble it isn’t the leverage itself it is failing to understand how leverage affects their risk. As long as you understand that and account for it in your investment strategy leverage can be a great tool.

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