April 27, 2007, 10:49 am

Leveraging Strategies

by: The Financial Blogger    Category: Leveraging Strategies
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Making money without having money. Is it possible? Yes. Is it risky? It depends. According to some financial professionals, leveraging strategies are the best way to loose money. According to others, they are the best invention since the stock market. Who’s right? It depends ;-).

The problem with many people is that they think about their potential gain and the fact that they are “playing” with others people money. In fact, many of them don’t realize the risk involved in such financial planning. I’ll talk about which kind of risk is related to the leveraging strategies later on. For now, let’s concentrate on the technique itself.

Leveraging consist in borrowing others people money on invest in a project. Let’s pretend you have $50,000 to invest in a start-up. You know you can do little with that amount even though it is sufficient to start the company. Imagine now what you can do if you have $500,000 instead. The potential of the company is much bigger with such start-up funds.

Leveraging is thinking big. You can’t afford it? Borrow money from someone else! Leveraging strategies are based on the fact that you can borrow money at a lower cost than your potential return. In other words, it’s like borrowing $200,000, paying back $10,000 in interest charges while you are making $50,000 out of your investment. Therefore, you cash in a net profit of $40,000. All of this without having to spend a penny as the cash down was borrowed and the interest paid among the profit. This is why we are talking about “playing” with others people money.

Over the years, financial institutions made custom leveraging products. They are now financing the purchase of assets that they can take as collateral. These securities can be mutual funds, stocks, properties and other investment products. Banks will then provide enough funds to buy the assets and register a lien on it. Therefore, you can’t dispose of this asset without reimbursing the loan. On the other hand, you will benefit for the full usage of the assets and receive any generated income.

As long as you mare making more money than the cost of borrowing, leveraging strategies are seen as a powerful financial planning tool. However, several risks are linked to these investment methods. I’ll review them in the next post.

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