How Financial Leverage Magnifies Your Returns - And Risks
How Financial Leverage Magnifies Your Returns - And Risks
Financial leverage, which is the use of borrowed money, magnifies returns.
Business and investment gurus tout how you can make big money with little money of your own. They show how using other people’s money can make you rich.
It’s true that using other people’s money, known by the acronym OPM, can increase your returns. But OPM can also be like the drug opium. Its highs come with crashing lows. Borrowing large amounts of money increases the risk your business may run out of cash or have big losses in a downturn. I’ll explain how this works and how to reduce your risk.