Leverage in Investment

Leverage means The use of credit or borrowed funds to improve one’s speculative capacity and increase the rate of return from an investment, as in buying securities on margin.

Investing is already a high risk activity, according to those not used to do investment. If to use leverage in our investment, it means the risk involved is even higher. But only with the proper use of leverage, a person can grow rich even faster. We must have heard that most wealthy people actually had gone through some difficult years prior to their success. Normally, they are able to double their income every year after those initial struggle. They certainly use some form of leverage. Example:

1. Buying property with bank’s money. In order to own a RM100,000 real property, we only need to pay 10% down payment of RM10,000 for residential property. When the property appreciate to RM110,000, we made a gain of RM10,000, which is a 100% return from our initial RM10,000.

2. Buying warrant instead of it’s mother share. Warrant itself is a form of leverage. When the share price rises 10 sen, the warrant will normally follow by 10 sen as well. Those who bought warrants know that warrant is a derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame.

3. Borrowing money to do business. That’s how entrepreneurs are able to build their wealth in a short period of time ( 3-5 years). They use the bank’s money by paying them 4-9% interest, but are able to produce more than 20% return per annum in their business.

If we can learn the art of using leverage, we will be able to grow our wealth much faster!

Study more about leverage:
Using leverage to stimulate investment

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7 Comments

  • japher

    Reply Reply January 12, 2010

    thanks for your lessons because I improved my English langauge littel pit but I am not understand leverae and investment could you plz to clearfy
    best regrad

  • Buggy

    Reply Reply January 13, 2010

    Leverage = using Other People Money to put money into your pocket
    Investment = Using some kind of vehicle / instrument to put money into your pocket.

  • Terry

    Reply Reply December 8, 2010

    KC,

    This is an investment topics. Would you write an article on how to secure bank/goverment fundings for Innitial business capital? Checked out BNM website but not much of information though.

    Looking forward to some insights.

  • Peter Lim

    Reply Reply October 17, 2011

    I’m a strong believer in leverage, but I believe before learning the art of leverage, we should first learn the art of getting good returns from our assets safely and surely. Otherwise, leverage might cause more harm than good.

  • Tan Yong Chuon

    Reply Reply February 25, 2013

    Lau

    The savvy affluent also using insurance with investment-link policy
    to leverage wealth creation

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