While leverage can increase your
return, it can also expose you to significant risk.
If you default on your mortgage,
the lender can repossess
your home even if you have met your payments for
many years. That’s because leveraging requires
you to pledge something of value to secure the amount
your financial partner is putting into the venture.
And if you had to sell your property for less than
you borrowed, you’d still owe the lender the
full amount remaining on the mortgage.
If a stock you buy on margin drops below a predetermined
percentage of its purchase price, you must add money
to your margin account so that your broker’s
loan is not in jeopardy. And if you sell at a loss,
you still must repay the margin loan in full.
The more volatile the investment you leverage, the
greater your risk of significant losses. In fact,
you can lose more than the amount you invest, which
you can’t do when you pay full price.
