{"id":1003,"date":"2007-04-06T13:00:59","date_gmt":"2007-04-06T20:00:59","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/2007\/04\/06\/saving-and-investing-what-is-leverage\/"},"modified":"2023-05-22T11:45:34","modified_gmt":"2023-05-22T17:45:34","slug":"what-is-leverage","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/what-is-leverage\/","title":{"rendered":"What is Leverage?"},"content":{"rendered":"<p>In today&#8217;s episode of &#8220;Saving and Investing&#8221;, Michael Fischer explains a concept I&#8217;ve heard mentioned a lot, but have never understood. The term &#8220;leverage&#8221; is used in many financial books and articles, often referring to real estate investments. The concept has always puzzled me, even when I looked it up. Michael&#8217;s explanation is short and to the point. Leverage makes perfect sense now.<\/p>\n<p><iframe loading=\"lazy\" title=\"5. What is Leverage? - savingandinvesting.com\" width=\"500\" height=\"375\" src=\"https:\/\/www.youtube.com\/embed\/GBsyA0JGFLA?feature=oembed&#038;enablejsapi=1&#038;origin=https:\/\/www.getrichslowly.org\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" allowfullscreen><\/iframe><\/p>\n<p>A simple example of financial leverage: Say you have $10 that you want to invest in a stock. If you invest that $10 and it goes up 10%, you&#8217;ve made $1. However, if you&#8217;re able to borrow an additional $90 to purchase that stock, you&#8217;d have $100 total to invest. If that stock goes up 10%, you&#8217;ve made $10. This is leverage: borrowing money to magnify returns. (Of course, losses are magnified as well.)<\/p>\n<p><iframe loading=\"lazy\" title=\"6. Principles of Leverage - savingandinvesting.com\" width=\"500\" height=\"375\" src=\"https:\/\/www.youtube.com\/embed\/T-X8LpzCTkM?feature=oembed&#038;enablejsapi=1&#038;origin=https:\/\/www.getrichslowly.org\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" allowfullscreen><\/iframe><\/p>\n<p>A home mortgage is a common example of leverage in practice. In general, a homebuyer has only a small amount of the purchase price. Most of the money for the transaction is borrowed from a bank. House prices tend to increase with time. By using leverage to purchase a house, we&#8217;re able to magnify our return on equity.<\/p>\n<p><b>Why do I like Michael&#8217;s video series so much?<\/b> (And make no mistake: I love it. I&#8217;m learning a lot.) Because he&#8217;s able to present these financial concepts clearly, in a way that makes sense. Compare his succinct definition of leverage to <a href=\"https:\/\/www.investopedia.com\/terms\/l\/leverage.asp\" target=\"_blank\" rel=\"noopener\">the definition at Investopedia<\/a>:<\/p>\n<blockquote><p>1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.<\/p>\n<p>2. The amount of debt used to finance a firm&#8217;s assets. A firm with significantly more debt than equity is considered to be highly leveraged.<\/p><\/blockquote>\n<p><i>Huh?<\/i><\/p>\n<p>On Monday, Michael explains financial statements. Then he dives into stocks, bonds, and financial markets!<i> <\/i><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In today&#8217;s episode of &#8220;Saving and Investing&#8221;, Michael Fischer explains a concept I&#8217;ve heard mentioned a lot, but have never understood. The term &#8220;leverage&#8221; is used in many financial books and articles, often referring to real estate investments. The concept has always puzzled me, even when I looked it up. Michael&#8217;s explanation is short and to the point. Leverage makes perfect sense now.<\/p>\n<p>https:\/\/www.youtube.com\/watch?v=GBsyA0JGFLA<\/p>\n<p>A simple example of financial leverage: Say you have $10 that you want to invest in a stock. If you invest that $10 and it goes up 10%, you&#8217;ve made $1. However, if you&#8217;re able to borrow an additional $90 to purchase that stock, you&#8217;d have $100 total to invest. If that stock goes up 10%, you&#8217;ve made $10. This is leverage: borrowing money to magnify returns. (Of course, losses are magnified as well.)<\/p>\n","protected":false},"author":3392,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[492],"acf":[],"_links":{"self":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/1003"}],"collection":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/users\/3392"}],"replies":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/comments?post=1003"}],"version-history":[{"count":0,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/1003\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/media?parent=1003"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/categories?post=1003"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}