How Sophisticated Investors Use Leverage to Boost Their Returns
An explanation of what "leveraging" entails for beginner investors, and guidance on how to practise it at minimal risk.
Although many would advise you against leveraging, it is actually a very useful method that could help you gain a lot of cash in return. As long as you know how to do it, it can be effective and you could earn a lot out of it. As such, maybe you have been considering it, yet you don’t know for sure how it works and how other investors use it to their advantage. Don’t worry – you will find out below.
What Is Leverage and How Does It Work?
Leverage is not that difficult to understand. It is a way of using borrowed money for investments. This could greatly help you if you want to increase your returns. For instance, if you choose to borrow $400 from your online brokerage instead of purchasing $100 of stocks, you could use those 400 to purchase $500 of stocks. Therefore, you will make a $50 profit if the stock then goes up by 10%. This is more than you would have made if you settled for the $100 investment.
So, leverage is an investment tool offered by Forex brokers to help boost your returns. Still, while it is helpful, that doesn’t mean that it’s always a successful method. If the stock declines instead of going up, then you would lose money from the original amount you had even before you accounted for the interest you will have to pay.
Ways to Use Leverage Properly
Leverage has to be used smartly if you want to be successful with it. Many investors have used it successfully, but if you’re a newer investor with less experience, you may wonder if you could become just as successful.
Well, take an example from sophisticated investors. They selectively use leverage, so they don’t overdo it. To be more specific, leverage is only a great method if you do it now and then, and not all the time. Doing it all the time will put you at risk of losing cash when the stock declines. So, make sure to use leverage for selective sets of opportunities, only when you understand the situation and are certain about it.
You should also start doing it while you’re young. It is more advisable to use leverage while you’re in your 20s, rather than when you’re in your retirement. As a young person, you don’t have as much capital able to deploy so you’re not as exposed to the stock market. You would also be able to tolerate it in a better way than if you were in your retirement.
Lastly, you should use various leverage tools too. That being said, you could trade with CFDs or margin, which are great for the longer-term. If you use multiple options, you have better chances of increasing your returns as long as you’re sure about specific events that will happen in the short term.
If used correctly, leverage can be a great way to boost your returns. Look at how the big investors are doing it and learn from them – it will be much easier that way.