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DID YOU KNOW? LEVERAGE

In physics, leverage refers to the mechanics of converting a small input force into a much larger output force. The financial world uses the term to describe the effect of borrowed capital on investment returns.

Financial leverage is often referred to as “gearing,” another word appropriated from physics. It describes the ability of an investor to use borrowed money to amplify the return on investment. This only works if the profit on the investment is greater than the cost of the debt.

Leverage also works in the opposite direction — if the investment is not profitable, losses are amplified, too. The use of leverage therefore alters the risk reward profile of an investment and should be used judiciously.

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