Leveraged Investment

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Definition of 'Leveraged Investment'

Futures and Options are Leveraged Investments. The allow you to control a large asset value with a small amount of money, typically called a margin payment.

Controlling a large investment with futures through margins and leverage can best be explained by taking an analogy to buying a house. You might buy a $500,000 house with a $50,000 (10%) deposit. If, in a year's time you need to move and you sell your house for $550,000 then (assuming that your payments on the bond were interest only) you make $50,000 on your $50,000 deposit which equates to 100% return on your investment.

The opposite can also happen. If the market drops the value of your house and you can only sell it for $420,000 then your loss is more than your deposit and you end up with $30,000 of negative equity.

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