The potential benefits and risks of a leveraged investment portfolio
Just as a lever allows you to increase your potential force, leveraged investing through the use of borrowed funds can increase your potential gains. If you're confident about an investment, leverage allows you to invest more than you otherwise could and potentially enhance your profits.
In addition, some investors may choose a leveraged approach to assist with their cash flow management. For example, rather than contributing the entire upfront investment amount from their own funds, investors can borrow to invest and only contribute a small portion of their own funds to meet the borrowing costs. This means that the investor may be able to use their remaining capital to make other investments and diversify their portfolio. For example, if an investor wanted $10,000 worth of exposure to one particular share, the investor could borrow $10,000 and only pay the interest expense of, for example, $1,000. The investor could then use their remaining capital to manage overall portfolio risk by diversifying their investment portfolio.