First-time home buyers face a number of hurdles and yet, the effort is well worth the ultimate reward. Considering all of the challenges that need to be met, the most important obviously involves securing the required financing to make a purchase and to be approved for a mortgage. There are many ways to save money before buying a new home and some are more effective than others. One interesting method is known as leveraging. What is leveraging? Why might it prove to be useful? Are there any risks involved? Let’s look at the answers to each of these questions.
Financial Leveraging Defined: Securing More for Less
The basic concept behind a leveraged financial trade is rather simple. Leverage involves the ability to pay a certain amount less than the full price of a trade. Thus, you will be able to purchase more of a specific asset than would otherwise be possible. Leverages are often expressed in the form of a ratio. Let’s take a look at an example in order to appreciate how this method works.
Imagine for a moment that you have $25,000 dollars to invest and that you are able to enter into a 3:1 leveraged trade. This signifies that you are permitted to purchase $75,000 dollars worth of stock for only the initial $25,000 dollars. In the event that the price of this asset rises, you will enjoy a much higher return than would otherwise be possible. This is why leveraged trades are popular methods to secure an additional source of income.
What Types of Leveraged Products are Offered?
Not all trades can be leveraged. This will primarily depend upon the product itself. Some of the most common leveraged products include:
- Spread bets
- Forex positions
- Contracts for difference (CFDs)
- Options
While any of these methods can be chosen, contracts for difference are exceedingly common. Some of the advantages of CFDs obviously include ‘leveraging’ and yet other benefits such as the ability to profit within a falling market and guaranteed stop-losses should never be taken lightly. Having said this, are there any downsides associated with leveraged trading?
The Possible Risks Involved
For the sake of both honesty and transparency, it is also important to address the potential risks of leveraged trading. The most serious is the fact that losses can far exceed your initial investment level. Just as profits will be obtained in the event that the price of the asset rises, the exact opposite is just as true (remember the ratio equation that was mentioned earlier). This is why a leveraged position should only occur if you are comfortable with the amount of risk that may be present.
One excellent rule of thumb is to never allocate more than ten per cent of your total capital towards a leveraged position. In the event that you incur a loss, this loss will not be so profound as to cripple your ability to invest in the future.
Ultimately, leveraged trading is a powerful tool to consider if you hope to purchase a new home in the future. Understanding the mechanics behind this type of investment represents the first and the most important step if you hope to enjoy financial success.