Leveraging

You may have heard the phrase “Don’t work for money. Let money work for you.” which is basically what investors do. Instead of leaving their extra money in a cash account, they use it to invest and earn more money. Some investors not only use their own money but they also use money they don’t own to invest. And this is done through borrowing from banks or any institution or even persons who are willing to give them a loan.

Using money you don’t own to use in business or investment is called leveraging. For example, if you can borrow at 3% interest per year and you can use that money to earn a guaranteed 4% per year then you will come up with positive net return after deducting your interest and capital gain tax payment.

Since you are using money you don’t really own, you have to be extremely careful when leveraging and make sure that you are not over-extending your self. Loans usually comes with collateral and if you fail to make a profit from your loan then you could end up not being able to pay it. Remember that leveraging is high risk if you are not putting it in an investment with a guaranteed return.