Financial Leverage


Financial leverage (or gearing) is a way to exchange financial safety for potential profit.

For example, let's say that you have $100 and are presented with an investment opportunity: for every $100 invested, you have 50% chance to gain 20$ profit and 50% chance to lose $10 over a day's time.

For $100, your maximum loss is $10. Since this will probably prove to be a profitable investment, you are willing to take more risk, and decide to borrow $900 from a friend to invest. (You can now invest 10 times $100.)

Now your maximum loss is $100 - you are taking more risk and making most use of the money you own. You use the money borrowed from a friend as a financial leverage, and increase your expected profit tenfold.

The investment works out as expected, you pay back the borrowed money, and walk away with $150 in your pocket.


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