Leveraging is the financial practice of utilizing borrowed money to increase positions held in financial products. For example, if an investor has $1000.00 of capital to invest, and leverages at 10%, then $1,100.00 is made available to that investor. The percentage at which an investor borrows based on underlying capital is called margin and is granted at varying percents by lenders, financial institutions and brokers. Leveraging can be used in a number of ways and to purchase an array of financial products.
The act of leveraging itself is not a guarantee money management success as using leveraging to invest can involve financial risk. However, when used prudently and efficiently, leveraging has the potential to increase net gains and thus net worth that is necessary for financial independence. In light of the financial possibilities leveraging make possible, this article will discuss how to leverage, and methods of leveraging in addition to providing tips and techniques that may be helpful when leveraging.
How to leverage
In order to make use of leveraging one must have either access to a large amount of capital or borrowed funds. Generally, an existing capital base must be present to obtain leverage at reasonable rates, otherwise unsecured loans may be obtained at higher rates. Leveraging funds can be obtained from banks, angel investors, mortgage lenders, credit cards, business loans and/or grants. In other words, wherever there is a source of capital that is not one's own, leveraging may be possible.
The criteria each lender has for providing leveraging funds varies. For example, banks may not consider investment loans but may consider business loans based on credit history, rating, business plan(s), business success etc. whereas a mortgage broker may consider existing capital and income in addition to the previous criteria. Investment brokers and/or private lenders may consider different factors when deciding to provide leverage capital.
To leverage one must decide what to leverage. In other words, after leveraging credit or margin has been acquired, a product, business or service is invested in using leveraged funds. For example, to leverage via stock trading, one may have margin with which additional stocks can be purchased.
In options trading, leverage is often used to obtain a multiple of one's actual capacity to invest allowing the investor to assume a large stake in the stock option. Leveraging is also used in commodities trading and foreign exchange trading. Mortgages and business loans are also examples of leveraging as more money is borrowed than the buyer is able to provide in order to purchase a home or operate a business.
Methods of leveraging
There are several ways to leverage and these methods are determined in part by where the leveraging comes from. For example, if leveraging is obtained for a mortgage, the criteria, capital requirements and interest rates are often pre-determined. With riskier leveraging such as in foreign exchange and commodities investing, leveraged capital can be lost far easier as the underlying asset can be more volatile leading to greater losses. The following is a list of sources for obtaining leveraged capital.
• Private lenders ex-angel investors, and venture capitalists *Mortgage brokers ex-home equity line of credit (HELOC) *Commercial banks ex-Business loans, equipment loans *Credit cards ex-Private and business credit cards *Lines of credit ex-bank overdraft protection *Investment brokers
ex-FOREX platforms, commodities exchange *Other loans ex-unsecured loans, title loans
Leveraging tips and techniques
When leveraging risk management is important because leveraged money is borrowed money. As with all investing, fiscal responsibility is helpful in optimizing financial decision making for the better and in developing the goal of financial freedom. The following tips may be helpful when leveraging.
• Due diligence: Whether it be a property, stocks or another type of investment vehicle, researching how the leveraged capital is to be used can help with assessing the amount of risk involved.
• Percent of capital leveraged: When leveraging with risk investments, using a smaller percentage of leveraged capital conserves capital if a margin call is required on investments that decline in value.
• Interest rate and fees: The lower the interest rate and fees associated with leveraging the better. Obtaining a lower leveraging cost helps maximize profits.
• Strategy: Developing a sound and proven leveraging strategy can also minimize risk and help facilitate profit as well as reduce the amount of time it takes to reach financial independence.
• Qualification: Knowing what it takes to qualify for and maximizing available leveraged capital is key in leveraging investments. Maintaining and growing capital base, good credit, and income are all useful in various decisions by lenders who offer leveraging.
• Time: Allow some time for leveraged investments to perform. Financial independence doesn't necessarily happen overnight, thus time is a crucial element in utilizing leveraged funds.
Summary
Obtaining financial independence through leveraging is a method used by many individuals and businesses. Leveraging is also used to increase net worth and grow profits and businesses. Without leveraging, financing investment goals may not be possible and consequently, the practice of leveraging is an important element in financial planning for higher capital gains and/or profit growth. This article has illustrated how leveraging works as well as explaining different methods of leveraging and leveraging techniques.
Leveraging, if obtained and used correctly can lead to financial independence, and is thus a tool for obtaining financial independence. It is not necessarily easy to obtain and make good use of leveraged capital and the return on leveraged investments is not guaranteed, however the financial possibilities of leveraging are considerable. Moreover, by being aware of how leveraging works, where to obtain leveraging and how to best use leveraged capital one may increase their chance of obtaining financial independence.
Source: http://www.investopedia.com/terms/l/leverage.asp
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