Generally speaking, financial leverage is a tool to amplify investment results. Financial leverage is a multiplication symbol. Using this tool, the final result will increase in a fixed proportion, whether it is profit or loss, so while increasing the investment income of investors, there will also be greater investment risks. Financial leverage is usually used by investors for futures, foreign exchange market and other investments.
Financial leverage is just a multiplication symbol (*). With this tool, the investment results can be amplified, regardless of whether the final result is profit or loss, it will increase at a fixed ratio. Therefore, before using this tool, investors must carefully analyze the income expectations and possible risks in investment projects. In fact, the safest way is to minimize income expectations and maximize risk expectations.
The investment decision made in this way is bound to fall into your expectation. When using financial leverage, cash flow expenditure may increase, which must be taken into account. Otherwise, once the capital chain breaks, even if the final result can be huge profits, it must face the end of early withdrawal.
Leverage comes from financial innovation, which is actually borrowing money for consumption and borrowing money for investment. The essence of financial leverage is that it is small and broad, and only needs to borrow a fulcrum to incite large output with small input, while in the financial field, it is to incite large funds with small funds.
Investors borrow more money by paying a certain percentage of interest on financing loans, and then carry out higher-yield investment operations. After making a profit, they only need to repay the interest of the borrowed funds, and the rest of the profits are all the gains made by investors. On the contrary, if the profit of the investment is lower than the loan interest or there is a loss, this method will also amplify the loss.
The essence of leverage is debt. After borrowing money and putting it into operation, you can use a small amount of capital (greater total assets) to achieve a big fight, so it is vividly called adding leverage.