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A way to define whether leverage is a good opportunity or not is the ability to manage leverage by each investor or the change of marketing conditions. It can possibly be both a good opportunity and a risk.
Leverage is not a specific word, normally used in the world of investment business. Leverage starts from a demand to invest in something or want to start some business but doesn’t have enough budget, so the solution is a loan. The cost of borrowing money is interest on the loan. If the loan is used to invest in some business or to buy something, it turns out that, in the long term, it’s always more profitable than interest. This investor will get wealthier and wealthier from the rest of the profit after the interest is paid out. A loan that makes people get poor is getting a loan for things that are not profitable or less profitable than the interest paid out. For example, getting a personal car loan. because interest is always paid, whereas a car cannot profit. Moreover, the value of the car itself keeps steadily going lower. In summary, leverage is a key to increasing an investor’s ability to get more compensation. Of course, more profit, but the risk is getting higher too.
Imaginary, we want to invest in gold for 10 baht. If 1 baht of gold costs 25,000 baht, that means we need to prepare 250,000 baht to buy gold. so that we can get 10 baht of gold. But “Leverage” is where we place some guarantee according to the terms of the contract at different times. For example, we invested in ‘Gold Future’ by putting only 20,000 baht in, but it was like we held on to 10-baht gold.
If gold prices reach 26,000 baht, that means we have a 1,000-baht profit. And if we hold on to 10-baht gold, that means we have a 10,000-baht profit. In the case that we actually held on to 10-baht gold, we got a 10,000-baht profit from a total investment of 250,000 baht. That means we have a total profit of 4%. However, if we use “leverage” instead (from any source, but in this case, it is “Gold Futures”), we put in 20,000 baht and receive a profit of 10,000 baht, resulting in a 50% profit.
But on the other hand, if gold prices decreased to 24,000 baht, holding on to 10-baht gold made us lose 10,000 baths. That means we lost 4%. But if we invest in “Gold Future”, we’ll lose 50%.
Using leverage along with good management will be a great opportunity to make a lot of profit. The bank investor is investing a lot of money in the leverage business along with good management too. Banks borrow money from depositors and change this money into loans for some businesses by receiving high returns to pay interest to depositors and the rest as profits to shareholders. This number is reflected in the bank’s own financial statements with a high leverage of 7-8 times (from the D/E ratio). Of course, doing a leveraged business like this is not easy. It needs to be managed with careful management.
The investor can also use leverage in the investment, but we have to repeat that using leverage must go along with good management. Using unmanaged leverage will end up with very severe damage. Buying shares through a credit balance account is also a leveraged. If an investor has good management and gets a loan to buy a share in a good marketing condition, or invests in creditable shares to support the share price, set a cut-loss point. This kind of investing behavior is called “good leverage.
On the other hand, another investor buys shares according to rumor, doesn’t do a cut-loss, and doesn’t follow the basis of shares and marketing conditions. This investment behavior using leverage must be dangerous and should be avoided. Don’t forget that an investment made using leverage is over-investment. If the investment made a profit, it was going to be a lot of profit. In contrast, a lot of money will be lost.
Except from “Credit Balance” from the Thai stock exchange, the other famous leverage is derivative, which has Derivative Warrant (DW) and futures contracts (also called Effective Gearing). According to the system and the way they work, it itself has Leverage through a cost that runs through the board, so it isn’t a normal form of loan Leverage. For example, share A, according to DW, has a ratio of 3 times. When a share’s A price moves 1%, the DW price will move 3 times, or 3% too. The investor that invested in DW was like, “They are using leverage three times.” So, this example above is suitable for investors with the right leverage habits, but not for those who are unprepared and lack the discipline to use good leverage.
Judging or attacking, whether leverage or high ratio, it is something that must be avoided. or unaware of each investor’s leverage management capabilities. or various market conditions that keep changing. It might be an incorrect belief. In fact, leverage is both an opportunity and a risk. It is something that businessmen or investors can decide for themselves. Whether to use it or not depends on the suitability of each person.
However, leverage can be very useful in the capital markets, which investors should carefully study because leverage can be an opportunity or a way to bring investors down. It depends on the investor’s ability to manage.
Reference : bangkokbiznews moneybuffalo
