Leverage: friend or foe?

Leverage: friend or foe?

leverage-seesaw

Borrowing and leverage are two related concepts that are often conflated, however each has distinct risks. Leverage refers to any technique to multiply the gains and losses on an investment. Borrowing is one way to achieve leverage, but you can borrow without levering and lever without borrowing. Keeping the terms straight is essential for evaluating risk.

Example 1: A simple tale…

The simple example of using leverage familiar to most involves borrowing money to buy more of an asset. For example

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