How to benefit from leveraged financial investments

Financial leverage is a way to amplify the results of investing in the world's stock markets. Find out what it is and how to do it.

 The higher the degree of leverage, the higher the investment results, if everything goes well, or the higher the losses, if something does not go as planned. The use of leverage is therefore an important decision that should be considered and, preferably, monitored by professionals. Find out what investment leverage is and in which situations it should be considered.

What is financial leverage

Financial leverage means using loans to buy financial assets. By using credit, the investor can "leverage", i.e. expand an investment that can be made in different types of assets. 

It is a mechanism used by investors looking to take advantage of an investment opportunity, and who need more money than they have available at any given time. If it goes well, the outcome of the transaction is expected to be sufficient to settle the loan and the interest thereof, and still reward the investor. But it can also mean the loss of the leveraged amount for which the investor is liable.

Take this example: an investor uses €1,000,000 of their own money to buy shares in a fund that generates €150,000 in annual dividends. In this case there is no need to use leverage because their wealth is sufficient to cover the investment. The annual return is 15% on equity.

If the same investor only has EUR 200,000 available, they might consider taking out a loan to get the amount of €1,000,000, a leverage of five times the equity invested. Thus, with the same return of €150,000, the return on equity rises to 75%.

There is yet another reason why financial leverage is widely used byinvestors. To trade some derivative financial instruments, such as Futures or CFDs, it is necessary to provide only a part of the invested capital, thus leveraging the investment.  

The advantages of financial leverage

• It multiplies investment capacity. The main advantage of financial leverage is that it provides greater investment capacity in market opportunities. With 3x leverage, for example, a capital of €100,000 becomes €300,000.

 

 • It is a way of getting the necessary collateral to access financial derivatives. Investing in Futures and CFDs allows one to benefit from both rising and falling markets but requires the investor to post initial collateral. This way it is possible to take long positions if the outlook is up or short-selling positions if the outlook is down. 

 

 • Leverage generates benefits of scale. If the investment portfolio appreciates in value, it will increase the investor's capacity to make new investments.

There are also several potential disadvantages to take into account. The financial market is subject to constant changes that can generate losses. Leverage amplifies this loss as the investor can, in extreme cases, lose the entire loan amount. In some investment accounts these can be greater than the amount invested.

How to access financial leverage 

At Banco Carregosa, we have developed a solution specifically designed to support our clients in their investments. 

The Margin Loan Account allows you to leverage your financial investments up to 5 times. The amount you deposit in the margin account at the time of contracting is multiplied by the leverage to determine the maximum investment you can make. When you deposit €100,000 and choose a leverage of 3 times you can invest up to €300,000. Banco Carregosa gives you a maximum amount of €200,000. Each position has a margin requirement that must be covered at all times by the client's assets.

As long as the cover is sufficient, you have a credit with a limit defined by you at the time of contracting, through the selected leverage and the amount allocated to this product.

"The Loan Margin Account is a solution designed for discerning investors, offering structured and diversified strategies to magnify expected investment returns."

João Queiroz, Head of Trading 

 The use of leverage magnifies the investment results, whether good or bad. Before making this decision you should assess whether you have sufficient knowledge about the vehicles and risks involved. We therefore recommend that you contact our team of experts so that we can present Banco Carregosa's investment solutions in detail.

Contact our investment team to find out more about financial leverage and how it can be applied to your particular case.

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