How Do You Use Debt To Make Money – Americans are up to their necks in debt according to debt org the total US consumer debt as of 2019 is thirteen points eighty-six trillion dollars. This comprises mortgages, credit cards, auto loans, and student loans. Consumer debt helps the economy to grow and economic growth means there will be higher paying jobs which makes it easier for individuals to pay off their loans quicker.
Debt allows you to get a home pay for your education or your child’s and own a car without having to save up all that cash first.
However, debt if not effectively managed can be devastating especially when the economy goes into a downturn as it is now in a recession job are lost which makes it tough to repay loans. Consequently, it goes into default ruining the individual’s credit report and their ability to take further loans in the future. Even in a strong economy, most people tend to take on too much debt due to financial and discipline unexpected medical bills, and other circumstances.
Consequently, a lot of individuals and families struggle financially living paycheck to paycheck therefore it’s no surprise that debt has taken on a negative connotation. There’s been a lot of books articles TV shows and resources dedicated to teaching you how to get out and stay out of debt. But debt is not all bad if you learn how to use it properly debt can be a route to wealth. The keyword here is leverage a lever helps you to lift a heavy object with relatively small effort. Similarly, debt can be used as a lever to multiply your monetary returns.
Leverage refers to using borrowed funds to exponentially increase your returns with leverage you can get profits that otherwise wouldn’t have been possible using just your money. However, you stand a higher risk of losing your capital. So here are five ways you can leverage debt to make money.
How Do You Use Debt To Make Money
1. Margin Investing
Margin investing allows you to aggressively buy more shares than you could afford. You can make a lot of money if things work out as expected. On the other hand, when things go south you risk losing at all. This is how it works if you say you have $10,000 in your brokerage account you can open a margin account based on your initial investment. With a margin account, you can only put up a maximum of 50 percent of the cost of a stock, therefore if you intend to purchase stock worth $20,000 the brokerage where you have the $10,000 will loan you an extra $10,000 to complete the purchase.
If the stock price gains you can repay the loan and be left with some profit on the downside the stock could fall and if it falls below a particular value your brokers will make a margin call. Margin calls are demands for additional funds or securities to bring a margin account up to the minimum maintenance margin. If you can’t meet up with the required additional funds or securities your broker may force you to sell assets no matter the market price to meet the margin call.
2. Hedge Funds
Hedge Funds or funds that are typically pooled from high net-worth or institutional investors. The fund managers seek high returns with these funds using unconventional investing strategies. One such tactic is the use of leverage to chase massive gains, they engage in margin trading. That is leveraging their broker’s money to make bigger investments.
They also get lines of credit for investing with the hope their gains will exceed the interest. Investing with credit lines uses the same principles as margin investing. But this time rather than borrowing from the broker the hedge fund borrows from a third-party lender. Hedge funds are known for making huge returns with leverage. Some are known to lever up to ten times their total assets. On the downside, if a fund manager miscalculates they can lose all their investors capital and go out of business
3. Leveraged ETFs (Exchange Traded Fund)
Leveraged ETFs or leveraged securities allow investors and traders to amplify their returns by going long or short on an underlying index benchmark or commodity. Using borrowed money, futures, and/or swamps. Fund companies led investors to multiply returns as well as losses by as much as 300 percent. You can invest in specific bonds indexes, commodities, or sectors.
For example, the S&P 500 ETF trust takes the underlying S&P 500 index and supercharges it such that an upward one-time movement will result in a three-time change in the ETF value. However, it doesn’t always go as planned and the results aren’t guaranteed. The leveraged ETFs reset every day so if your strategy is to buy and hold your position will be reduced to nothing due to the way the ETF is set up. Even if the market performed remarkably well thus leveraged ETFs are meant for short-term trading.
Investors are drawn to leveraged ETFs because of the potential for extraordinary profits. During times of market booms, experienced traders can make unmatched returns with leveraged ETFs. The problem with leveraged ETFs is that they also magnify losses the same way they magnify gains. Your entire investment can be wiped out as single trade.
4. Short Selling
Short Selling is making a bet on the price of a stock going down rather than up. Investors borrow shares of stock from their broker’s accounts and sell them at the current market rate. They plan to repurchase those stocks at a lower price in the future and return the borrowed shares to the owner or lender. Short sellers hope to profit from the difference between the proceeds of the short sale and the cost of buying back the shares, This is known as short covering.
For example, if you short sell a hundred shares of a $20 stock you’ll end up with $2,000 in your account. If in time the price depreciates to $10 per share you can cover your position by buying back the 100 shares at $10 which will cost you $1000. With your position covered you’ve made a profit of $1,000 from the trade. It’s the broker’s call to decide if a stock can be shorted since they find the shares to lend to the short-selling trader. This is usually automated and the broker will also get back their shares automatically once the short is covered. However short-selling calls for action the losses are unlimited that is a short seller can lose far more than his initial investment.
5. Forex Trading
Compared to stocks forex trading allows you far greater leverage. In some cases, you can leverage your account up to 101. What this means is that for every $100 in your account you’ll be able to trade up to $10,000. The forex market offers such high leverages because the risks involved are more manageable.
Leverage is a function of risk so if a trade is well-managed the risk is also well-managed which is why they can offer such high leverages. Currency trading allows investors to enter a transaction with borrowed funds. The borrowed funds are used to increase the investor’s trading position beyond what they would otherwise have as available cash balance. They can then potentially turn their initial small investment into massive amounts instantly. Conversely, an investor can amplify his losses in the same manner and the higher the leverage you apply on the capital. The higher the risk you’ll take on a trader could be cleaned out in minutes.
So in conclusion debt has taken a bad rap and for good reasons, too many people take on too much debt for the wrong reasons and end up struggling financially. Good debt will work in your favor if used effectively. Despite all the negativity around debt you can borrow and with the right knowledge in the power of leverage grow your wealth exponentially.