When to use leverage to invest and when not to use leverage to invest

When investing, leverage could multiply your investing exponentially and it could be quite addictive when you see the earnings in big numbers. Human tend to forget that any big number multiple by 0 equal 0. that’s how people wiped out their investment account.

For long term investing, you may want to avoid leverage.

Leverage has it’s place in day trading. Since you can use stop loses and you are trading actively. However, If you are a beginner you may want to avoided as well.

Here is an example of leverage simplified

Image you are looking to double your money and the start value 100.

If the start value drop to 90, that’s a 10% lost. However, since you were looking to double your money with leverage, that’s a double lose, which mean that you lose 20%. Which mean that your value now is 80.

Now, imagine that the start value of 90 goes up by 10%. So now the value is 99.

However, since you were playing with leverage doubling your money. Your real start value is 80 and it goes up by 20%. which mean that it goes up to 80×1.20 = 96

That’s playing with doubling your money.

Now imagine that you decide to play with 10x leverage. If your asset drop 10% this means that you have lose 100% of your money. Ouch!

For long term investing you may want to look into Dollar cost average.

For day trading you may want to look into 1% rule for risk management.