If so please give examples. I don't have a clue...
2006-08-28 10:38:58 · 6 answers · asked by Anonymous in Business & Finance ➔ Personal Finance
Leverage is how you make decent gains on small movements. It's basically a short term loan.
Let's say $10,000 gets you a $100,000 amount of leverage. The stock you picked went up 10 cents that day, but because of leverage you got a total of 10X that amount of $1 per share. The after you loan fee (they just don't just hand you the money), the taxes and the buy and sell fees, you end up with a profit of 40 to 50 cents a share.
Now if your stocks went down, you have to still give back that $90,000 and the difference out of your own pocket, plus the buy and sell fee plus the loan fee. This is what happened in mass that helpped lead to the Great Depression. Leverage was easy to get, but paying it back was hard.
Leverage is more used in housing since most people have to take out a loan to buy a house. Donald Trump swears by leverage even though his company recenly went bankrupt.
2006-08-28 10:54:08 · answer #1 · answered by gregory_dittman 7 · 0⤊ 0⤋
You can use both together for maximum effect.
Leverage is taking out a loan so you can invest more cash than you have on hand. Compound interest is the ability for investments to geometrically increase in value as gains build on gains.
Leverage is taking out a home loan. If you don't want to invest $100k in a house, you can put down $20k and a loan for the rest. If the value of the home goes up 10%, you make $10k, but only had to invest $20k, for a total 50% return.
Compounding interest is investing $1 in something that pays you 5% back. After year #1, you'll have $1.05 invested, so the interest is no longer $.05, but $.0525, etc. This builds up over time for great overall effect.
The point is that leverage increases both risk and return, compounding usually minimizes both. You can take advantage of both by altering your investment portfolio or - if you were to leverage investments that give off cash, you could reinvest this cash into leveraged investments, and essentially take advantage of both phenomena.
Hope this helps!
2006-08-28 18:16:13 · answer #2 · answered by Shofix 4 · 0⤊ 0⤋
You are talking about apples and oranges. Compound interest is earnings, usually on liquid assets and the earnings are added to the principal to create a situation of compound interest because now the interest earns interest.
Leverage on the other is the use of other peoples assets to acquire more assets for your self. Because you are using other peoples money for a small portion of the newly acquired asset, and it the asset is purchased correctly, you have massive positive cash flow without any investment of your own, blowing away any compound interest investment anywhere, because you have to have your money for the compound investment. It very seldom if at all be done with leverage, unless you know about discounted notes. But that is a different subject.
2006-08-28 21:00:11 · answer #3 · answered by Angelo 2 · 0⤊ 0⤋
Leverage is better...think of it this way...would you rather have 100% of your own efforts, or 1% of each of 100 people's efforts? That's leverage...hope this helps!
2006-08-28 17:42:14 · answer #4 · answered by Beth 3 · 0⤊ 0⤋
It depends on your tolerance for risk.
If you are like my wife, bank CDs are wonderful. (low risk)
For Oil Futures trading, leverage is the way to go. (high risk)
2006-08-28 17:53:59 · answer #5 · answered by SPLATT 7 · 0⤊ 0⤋
No, I dont.
2006-08-28 17:41:09 · answer #6 · answered by just me000 4 · 0⤊ 0⤋