Demystifying financial leverage
This seems a bit too wordy to demystify the concept. Here&#x27;s a simpler example.<p>1. Bank A offers you 5% interest for a 1 year deposit. You deposit $100 of your own money. You are unlevered. Things go well and after a year you receive $105, a neat 5% return on your investment. Or things don&#x27;t go well, bank A turns out to be a scam and you receive $0, a -100% return.<p>2. Bank B offers you a loan for a year for 4% interest. You borrow $900, together with your own $100 you deposit $1000 at bank A. You are levered 1:9. Things go well and after a year you receive $1050 ($1000+5% interest) from bank A, you repay bank B $936 ($900 + 4% interest), so you&#x27;re left with $114, a very neat 14% return (almost triple the unlevered return). Or things don&#x27;t go well, bank A turns out to be a scam and you receive $0. But now you still owe bank B $936, so together with your own $100 loss you made a -1036% return. Oops.<p>p.s. It&#x27;s called leverage because (like a physical lever that allows you to lift something much heavier than without) supplementing your own funds with lots of borrowed money allows you to tackle something much bigger than using only your own money, like buying a house or starting a business or getting 5% on $1000 instead of on $100.