Leverage ~ An Introduction
Leverage is a technique that’s deployed to multiply one’s losses or profits, typically through buying assets using borrowed funds hoping for more income through asset appreciation, which would eventually trump the interest borrowing entails. However, there could be a risk of borrowing cost trumping the income that asset appreciation could generate, which means the losses would multiply further. Leverage can multiply the profits when the asset bought through borrowing is sold and the returns exceed the costs, though when it goes the other way round, it could multiply the losses. Originally called levering, it is now known as "leveraging" by finance experts. “Leverage” is quite tricky to understand and confusion is partly because of the broad-spectrum use for the word.
Let us understand this in more practical terms with an example. As Matthew Roddan would put it, understanding the nuances of investment and financing is important in the realm of business. That’s one reason why Project Ninety Nine offers a platform to share and discuss the nuances of investing and business. Mortgaging a home is a common scenario. When homeowners mortgage their homes to deal with a financial crisis and keep up the repayments until they’re able to flip it for profits, or redeem themselves from their issues, it is called leveraging.
Not many of us want to get into more debt to come out of a problem, but leveraging is all about taking a calculated risk. Generally, the borrowing and buying of asset is done during a downtime, and the selling of the asset obtained through leveraging is sold when the market is good for a profit. This is done quite often and there are times when it could go wrong, like during the recent economic depression. However, the key to succeed with leverage is making practical assumptions and understanding the risks involved, while making key decisions.
Leverage is not a new concept and has been around for a while, which can be vouched by numerous businesses and individuals who have taken this route. Leveraging usually works when done right and is backed by thorough analysis of possibilities. Investments also work likewise, a reason why investors always ask for a business proposal and financial statement. It is important to understand that businesses are calculated risks and investors often lend or investors after analyzing the possibilities – leveraging profits or managing losses. Understanding the risks involved in investing, Project Ninety Nine started by Matthew Roddan intends to give a platform where investors can discuss, strategize, plan and share knowledge. This way, profitable ventures could be identified, potential entrepreneurs identified and groomed, etc. In short, leveraging is an investment strategy that can propel one’s finances or doom them further, depending on how it is done!