Double-digit Yield Through Leverage Investing

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What is Leverage

Leveraged investing is all about borrowing money to invest. The basic principle is simple, and it is commonly used in property investing which always involves a considerable sum of capital. For example, you are looking to buy a property at $1m, based on the regulation in Singapore, you are obligated to put down at least 20% or $200k as a downpayment. The remaining amount of 80% or $800k can be loaned from the banks. In other words, you just need $200k to own an asset that worths $1m. This process is called leveraging or buying on margin.

Leveraging is one of the reasons that makes property investment an attractive instrument. Return on investment (ROI) is always measured as a percentage return. Taking the example above, assuming the property price goes up to $1.1m, the profit is $100k. Without any leveraging ($1m investment capital), the ROI would be 10% ($100k/$1m). With leveraging ($200k investment capital), the ROI is boosted to 50% ($100k/$200k)!

The same principle applies to REITs or stocks investing. If your Capitaland Integrated Commercial Trust (CICT) shares go up by 5%, and if you have $1,000 worth of those shares, your profits will be $50 with an ROI of 5%. It is decent but not great. But if you have $3000 worth of the shares, that 5% gain will make you $150, 3 times the original returns.

However, the problem is, you might not have $3000. And even if you do, you might not want to risk all your money on a single trade. Leveraging or investing on margin could be a solution for you. With a share margin account, you gain the ability to loan from a stockbroker, which allows you to use that loan amount to invest more. This will help to magnify your potential returns. Of course, leveraging is a double-edged sword. It amplifies your investment capital and potential gains, but it also increases your losses at the same time. You will expose to higher risk when the stock price moves against you.

Although leverage can be dangerous, it is a handy tool if you know how to use it properly. In this education series, we will look into details on how leverage works, the advantages and run through a detailed case study in the latter part to give you some confidence in using leverage.

How Leverage Investing Works