Leverage, or How to Make Money in Your Sleep | Financial Avisory Articles


Leverage, or How to Make Money in Your Sleep

Everyone knows that it is possible to work and make money. Usually, the more we work, the more we earn. Let's look at some ways we have to let the power of leverage return more to us even when we don't work more. With leverage, money gets returned to us in a sort of a self-propelled fashion. It doesn't matter to leverage if we are not working hard, or even if we are not awake.

 

Stockbrokers allow their clients to use leverage by buying stocks on margin. This means if you want to buy $1,000 worth of stock, your broker will lend you $1,000 more so you can buy twice as much. Therefore, if your stocks double in price, they become worth $4,000, and since you have only $1,000 of your money invested and $1,000 belongs to your broker, you have tripled your $1,000 to $3,000! You would have only doubled your money had you not been able to use the leverage provided by buying on margin.

 

Commodity brokers allow their clients to make money by using a lot of leverage. For about $1,500 you can control 5,000 bushels, or about $30,000 worth of soybeans. Here, if the price of the soybeans rises 10%, you make a profit of $3,000. Of course, it can go the other way, too, and if it does, you lose big. That's how it is with leverage. Still, fortunes have been made in commodities futures trading and it is a superb example of using leverage.

 

Another area where people can gain a large amount of leverage is through multilevel marketing. With multilevel marketing a person signs people into his down line. These people recruit and sell products for him, thus giving him the ability to make money with the leverage they provide.

 

Probably, the most ubiquitous form of leverage is the leverage you gain when you put down $40,000 to buy a $200,000 house. Sooner or later most families make a similar investment. It is leverage because the mortgage allows you to control an asset that is 5 times as big as the investment you have made. Should the price of your $200,000 property double, not at all an unheard of event in real estate, you will have made $200,000 on your $40,000 investment, or a return of 500%! Now that's leverage! It's no wonder people like to invest in real estate!

 

All these examples of leverage show ways to make money, even a lot of money, without doing more work. However, they all come with a potential downside. Certainly investing in stocks is a great thing to do, but the leverage found in stock investing isn't normally what one thinks of as very strong leverage.

 

There is a lot of leverage in commodities futures trading, but there is also an abnormal amount of risk. I find that it takes a certain type of person to trade commodities futures. Trading commodities futures isn't recommended for everyone.

 

Multilevel marketing isn't recommended for everyone, either. Though many success stories have been written because of multilevel marketing, it is a type of business that many people never find success with.

 

Buying a house on the other hand, is recommended for everyone, even if it is bought only to provide a place for someone to live. The price of real estate doesn't always go up, however. In the area that I live and invest in, real estate had a major slump between 1988 and 1993. In this time frame, real estate lost value drastically. Anyone who bought real estate in 1988, had to weather the storm, and if they did, they were richly rewarded by the mid '90's and they made out very, very well if they're still holding that real estate.

 

With real estate, it always seems that you'll come out ahead and make money if you don't give up. Buying at the right time can make you a lot of money in a real hurry, but buying at the wrong time can severely slow down your ascent to wealth. If you do buy at the wrong time, all you can do is hold on tight and wait for a turn around.

 

So far, throughout history, real estate prices have always broken sharply upwards when coming out of slumps. If you are able to weather a real estate down cycle until the market turns around, it will be well worth your perseverance because as the price climbs, you will gain leverage you need to make a lot of money in a real hurry.

 

So go put down 20 percent, get a mortgage and go live in your new house. Then, go take a nap and dream of all those dollars flowing into your bank account!

Ed Lathrop

About the Author:

The author of this article has built a website that prints out an amortization schedule for any loan or mortgage. This Website is free for you to use and you can print out as many amortization schedules, for free, as you want. Visit this site at Amortization Calculator. Also find out how to pay off your mortgage way ahead of schedule at Early Payoff Calculator.