Adding leverage increases your risk, but increased risk is one way to possibly gain better returns. There are many ways to gain leverage, from using loans, to options, to futures.
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A fundamental question is how much leverage you want to use. Brokerages make it all too easy to over-leverage. I usually use a leverage ratio between 1.3 - 1.5. For example, if I have $100k cash, I may use that to invest a notional value of $130k in a diversified portfolio.
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A fundamental question is how much leverage you want to use. Brokerages make it all too easy to over-leverage. I usually use a leverage ratio between 1.3 - 2. For example, if I have $100k cash, I may use that to invest a notional value of $130k in a diversified portfolio.
People use leverage all of the time for home loans, and it is not unheard of to use a 80% loan to value ratio for a mortgage, or a leverage ratio of 5. For a $500k home, you might put up $100k cash and take a $400k loan. You would likely do this at a reasonable interest rate, and your hope is the value of the home goes up faster than your interest charges. Your home value could fall, leaving you with a mortgage that is underwater, i.e. you owe more than the home is actually worth. All of this can apply to investing as well.