3 Ways to Leverage Your Investments

Leveraging your investments is understood as maximizing profitability through very specific types of debt. When talking about the stock market, it works as a credit limit made available by a brokerage firm and allows you to trade a higher amount of cash than what you have available at the moment.

As you may have guessed, leveraging your investments means that you can invest in the same way as big investors. This is the great advantage of this strategy: enabling small investors to also achieve great results.

If you’re not familiar with everything involved in leverage, we recommend you to take a look at the basics leverage trading for beginners.

Read also: How to Find the Best Stocks to Invest In

Several investment strategies offer the possibility to leverage your investments and getting to know them will allow you to get the most out of your capital.

So, let's talk about the three ways considered ‘best’ to leverage your investments:

1. Day trade leverage for your investments

Day trading is the most common way for investors who tend to leverage their investments. The purpose of these operations is to profit quickly, benefiting from small fluctuations in share price.

These traders adopt the strategy of carrying out a greater number of transactions to profit from the amount of all of them. Many of them live on the stock exchange alone or seek daily goals between 2% and 4% of profit per day.

2. Leverage your investments by selling short

Short selling operations, or selling short, is a tactic in which you seek to gain from the fall of a stock. For this you sell a stock even without having it and buy it back when it’s cheaper.

If this process lasts more than a day, you may need to rent this stock from an investor who has it and return it after repurchasing it. But if it is a day trade operation, this isn’t necessary. After all, in theory you will buy the stock and clear your debt almost immediately within a few minutes.

3. Leverage your investments in the futures market

The futures market is another fantastic opportunity on the stock exchange, where it is also possible to leverage your investments.

Instead of buying shares, you buy contracts, which can be commodities, indices, or even dollars. This means that you will be investing in products consumed worldwide and not just a specific brand.

The most fantastic thing about this market? When investing in futures contracts, you can leverage up to 30x your capital–a much higher limit than with regular stocks. Imagine this: with only €1,000, you could obtain the same result as those who invest €30,000.

Be aware of the risks of leverage

Of course, because you are investing a value that you do not have, a.k.a. contracting debt, this strategy also poses greater risks. Simply put, you will be accepting a greater risk, in search of a greater profit.

But don’t worry! Usually, operations that allow leveraged investing are very fast and therefore have minor fluctuations, such as 0.5% or 1%. Therefore, if you do things correctly your profit or loss could be relatively small per operation.

You can be very successful if you do things correctly in several transactions. Imagine carrying out two or three operations and making 1% profit per day. At the end of one month, your capital will have multiplied in an incredible way.

Other types of leverage

There are also other terms that appear frequently, and although they may resemble the capital market and the meaningful leverage that we are discussing, you should not confuse them.

Financial leverage

This is a term used in the business sector and refers to the ability of a company to increase its profits without its financial expenses growing by the same proportion. That is, to maximize capital returns by investing less money.

This concept is very common in accountants' daily lives. The routine of these professionals also has several other similarities with the stock market.

Operational leverage

This refers to a company's attempt to leverage its sales and create new products from external financing or a loan, hoping that its profits will be greater than interest. It is measured by the relationship between operating income and earnings, before interest and income tax.

Administrators are aware of these concepts and, like accountants, they are often also great investors.

Bear in mind that leveraged investing provides not only greater profits, but also greater risks. This is why it is necessary to seek knowledge and rely on good analysis from experienced professionals, who can put you in the best probability scenario.