Americans are up to their necks in debt according to Debt.org the total US consumer debt as of 2019 is 13.86 trillion dollars. This comprises of mortgages, credit cards, auto loans and student loans.
But, debt isn’t all negative because 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.
Also, debts allows you to get a home, pay for a education or your child’s and own a car without having to save up up all that cash first.
So, how do you use debt to make money?
Debt can be devestating
However, debt, if not effectively managed can be devastating especially when the economy goes into a downturn as it is now.
In a recession jobs are lost which makes it tough to repay loans, consequently it goes into default ruining the individuals 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 dicipline, unexpected medical bills and other circumstances.
Consequently a lot of individuals and families struggle financially living paycheck to paycheck therefore it’s no suprise that debt has taken on a negative connotation.
Is debt bad?
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 then debt can be a route to wealth.
The keyword here is levarege, 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 levarage you can get profits which otherwise wouldn’t have been possible using just your money.
However you stand a higher risk of losing your capital so here are 5 ways you can levarage debt to make money:
5 ways you can levarage 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 it all.
This is how it works: Let’s say you have $10 000 in your brokerage account then you can open a margin account based on your initial investment. With a margin account you can only put up a maximum of 50% 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.
Calls are demands for additional funds or securities to bring a margin account 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 are 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 massivie gains.
They ingage in margin trading that is leveraging their brokers money to make bigger investments. They also get lines of credit for investing with the hope their gains will exceed their intrest.
Investing using credit lines
Investing with credit lines uses the same principles as margin investing. But this time rather than borrowing from the broker the hedge funds borrows from a third party lender.
Hedge funds are known for making huge returns with leverage and some are known to lever up to 10 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 ETF’s
Leveraged ETF’s or leveraged securities that 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 multiply returns as well as losses by as much as 300%.
What should I invest in?
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 1x time movement will result in a 3x change in the ETF value.
However it dosen’t always go as planned and the result’s arent guaranteed.
The leveraged ETF’s reset every day, so if your strategy is to buy and hold then your position will be reduced to nothing due to the way the ETF is set up even if the market performed remarkably well.
Thusleveraged ETF’s are meant for short term trading. Investors are drawn to leveraged ETF’s because of the potential for extraordinary profits.
During times of market booms experienced traders can make unmatched returns with leveraged ETF’s. The problem with leveraged ETF’s 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 brokers account and sell them at the current market rate.
Their plan is 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 short sale and the cost of buying back the shares.
This is know as short covering, for example if you short sell a hundred shares of a $20 stock you’ll end up with $2000 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 positon covered you’ve made a profit of $1000 ($2000 minus $1000) from the trade.
It’s the brokers 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 call for action, the losses are unlimited. That is, a short seller can loose far more than his inital investment.
5. Forex Trading
Compared to stocks, forex trading allows you far greater leverage. In some cases you can leverage your account up to 100:1. 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 leverage because the risks involved are more manageble.
What is leverage?
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 investors trading position beyond what they would otherwise have as available cash balance.
They can then potentially turn their initial small investment into massivie amounts instantly.
Conversly 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 effectivaly.
Despite all the negativity around debt, you can borrow and with the right knowledge in the power of leverage, grow your wealth exponetially.
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.
Summary: How to Use Debt to Make Money
If you didn’t get all that, don’t worry I didn’t either the first time. Then take a look at this video explaining everything you need to know on how to use debt to make money: