Definition
Using borrowed money to invest or amplify your returns. While it can boost gains, it also increases risk if things don’t go as planned.
What to consider
- Use borrowed money cautiously—it can boost gains but also losses.
- Ensure you have a solid plan to manage any debt.
- Review your risk tolerance before taking on extra leverage.
Real world scenarios
- Hannah uses leverage by taking a business loan to expand her bakery, hoping higher profits offset the interest expense.
- Omar invests on margin, magnifying potential gains and losses. He regularly monitors his positions to manage this risk.
- Over-leveraging leads to stress for Vijay’s startup, as debts overshadow limited cash flow. He scales back borrowing to stabilize finances.
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