The leveraged financial products, also known as leverage products or products with leverage, are those that offer the possibility of obtaining larger profits or losses than that would be obtained with a similar investment without leverage. This is achieved by using loans or credits to obtain exposure to an underlying asset, such as actions, currencies or raw materials.
The leverage allows investors to increase their exposure to an asset with a relatively small investment, but also increases the risk of loss. Leverage financial products can be highly speculative and are not suitable for all investors. It is important to understand the risks and understand the products before investing in them.
Risks and benefits of leverage financial products
Lealed financial products are highly speculative and can be very risky, so it is important to understand the risks before investing in them and only invest a capital that is willing to lose.
In case of taking this into account and being prepared, you must know what the risks and benefits of this type of product are.
Risks
First we must know that there are several risks in leverage products, these would be the following:
- Greater risk of loss: The use of leverage increases the risk of loss, since gains and losses are magnified. If the underlying asset moves against the investor's position, the losses may be greater than the investor has invested.
- Margin risk: Leverage financial products usually require a margin deposit, which is a guarantee to cover possible losses. If the value of the underlying asset falls below the required margin level, the investor must deposit more funds or liquidate its position.
- Interest rate risk: The risk of interest rate refers to the possibility that fluctuations in interest rates negatively affect the value of an asset.
- Credit risk: Credit risk refers to the possibility that the issuer of an leveraged financial product does not comply with its financial obligations.
Benefits
As for the main benefits of leverage financial products, we have the following:
- Greater profit potential: The leverage allows investors to increase their exposure to an asset with a relatively small investment, which can lead to greater profits.
- Greater flexibility: These offer greater flexibility to invest in a variety of assets, including actions, currencies and raw materials.
- Greater efficiency: The leverage can allow investors to obtain better yields with a smaller investment.
- Greater diversification: Leverage financial products can offer greater diversification in an investment portfolio.