Business

Leverage and what to know about it

What is the leverage meaning? It refers to the ability of managing or controlling a large amount of money using a small amount of money that you have and the rest which you borrow. In the financial language, it is referred to as OPM – other people’s money.

An example of leverage at work is when as an investor, you borrow money to use in investing in a stock.  If the price of let’s say ACME stock is trading at $100 and without leverage, you have $10000, the maximum number of the shares that you can purchase will be 100. In case the stocks of the company rises to $200 and you want to exit, the maximum profit you are going to make will be $10000.

But if you decide to go to the bank to borrow another $10000 and utilize it in buying the stock, you will be able to afford buying the 200 shares. In the event of the stocks doubling, your profit total will be $40000. After you return the funds that you borrowed to the bank, you will have a profit of $20000 minus the interest of the bank.  When working with leverage, it becomes useful for investors and traders.

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