Leverage: Amplifying Investment Returns and Risks

The journey of an investor often begins with a fundamental question: how can I make my capital work harder for me? While diligent research, prudent asset selection, and long-term vision form the bedrock of successful wealth creation, some investors choose to introduce an additional, potent element into their strategy: borrowed capital. This strategy, known as financial leverage, amplifies both potential gains and potential losses, transforming the investment landscape into one of exhilarating possibilities and profound risks. Understanding this duality is paramount for anyone contemplating the use of borrowed funds to enhance their investment returns.

Financial leverage, at its core, involves using debt to finance assets. Instead of deploying only one’s own equity, an investor supplements their capital with borrowed money, aiming to generate returns on the entire, larger pool of funds that exceed the cost of borrowing. Imagine purchasing a substantial portfolio of income-generating securities, or acquiring a significant real estate property, where a substantial portion of the acquisition cost is covered by a loan. If the assets appreciate in value, or generate cash flow that comfortably covers the interest payments, the return on the initial equity invested can be significantly higher than if no debt had been used. This magnification effect is the primary allure of leverage. It offers the prospect of accelerating wealth accumulation, enabling investors to control larger positions and potentially realize greater profits than their current capital base would otherwise permit.

However, the very mechanism that amplifies returns also magnifies losses. If the acquired assets decline in value, or fail to generate sufficient income to cover debt obligations, the investor faces not only the erosion of their initial equity but also the burden of outstanding debt. In severe scenarios, losses can exceed the initial investment, placing the investor in a negative equity position. This intricate balance of potential upside and magnified downside necessitates a profound understanding of market dynamics, risk management principles, and the specific instruments through which leverage is typically employed.

Understanding the Mechanics of Borrowed Capital in Investing

To truly grasp the implications of financial leverage, it’s essential to dissect the various mechanisms through which investors typically access borrowed capital. Each method comes with its own set of rules, costs, and unique risk profiles.

Margin Accounts: Leveraging Securities Investments

One of the most common ways individual investors employ leverage in the securities market is through a margin account. A margin account allows an investor to borrow money from their brokerage firm to buy securities. The securities purchased, along with other eligible assets in the account, serve as collateral for the loan.

How Margin Trading Works

When you open a margin account, you deposit a certain percentage of the purchase price of the securities, known as the “initial margin.” The brokerage firm lends you the remainder. For instance, if the initial margin requirement is 50%, and you want to buy $10,000 worth of stock, you would put up $5,000 of your own money, and the brokerage would lend you the other $5,000. This effectively doubles your purchasing power.

Federal regulations, specifically Regulation T (Reg T) of the Federal Reserve Board, govern the initial margin requirement for securities. Currently, Reg T generally permits brokers to lend up to 50% of the purchase price for most common stocks. Brokerage firms can, and often do, set their own, stricter “house requirements” that demand a higher initial margin or apply to specific, volatile securities.

Once the securities are purchased on margin, the investor must maintain a certain level of equity in the account relative to the total value of the securities. This is called the “maintenance margin.” If the market value of the securities falls, and the equity in the account drops below the maintenance margin requirement, the investor will receive a “margin call.” A margin call is a demand from the brokerage firm for the investor to deposit additional funds or securities to bring the account equity back up to the maintenance level. If the investor fails to meet the margin call within the specified timeframe (often a few days, but sometimes immediately), the brokerage firm has the right to sell some or all of the securities in the account, without prior notification, to cover the loan. This forced liquidation can occur at highly unfavorable prices, locking in substantial losses and potentially wiping out the investor’s entire equity.

Securities-Based Lending vs. Traditional Margin

While traditional margin accounts are primarily for active trading, some financial institutions offer “securities-based lending” (SBL) or “portfolio lines of credit.” These are typically non-purpose loans, meaning the borrowed funds are not explicitly used to purchase more securities but can be used for various personal or business needs, such as real estate purchases, business investments, or even education expenses. The investor’s existing investment portfolio collateralizes the loan. SBLs often offer more flexible repayment terms and potentially lower interest rates than other types of loans, as they are secured by liquid assets. However, they still carry the inherent risk of margin calls if the value of the underlying collateral falls significantly, forcing liquidation of the portfolio to satisfy the loan.

Risks Specific to Margin Trading

1. Amplified Losses: A small percentage decline in the value of the leveraged securities can translate into a much larger percentage loss on the investor’s actual equity. For example, if you buy $10,000 of stock with $5,000 of your own money, and the stock drops 20% to $8,000, your equity drops from $5,000 to $3,000 (stock value of $8,000 minus the $5,000 loan), a 40% loss on your initial capital.
2. Margin Calls: The requirement to deposit additional funds or face forced liquidation is a significant stressor. During rapid market downturns, margin calls can occur quickly and repeatedly, often when it is least convenient or financially feasible for the investor to meet them.
3. Interest Expenses: Borrowing on margin incurs interest charges, which reduce the overall return. These rates are typically variable and tied to a benchmark rate, meaning they can increase, further eroding profitability, especially in a rising interest rate environment.
4. Time Horizon Mismatch: Margin loans are typically callable on demand. If you’re using margin for a long-term investment, but market volatility triggers a margin call, you might be forced to sell a sound long-term holding at an inopportune time.

Real Estate Leverage: Mortgages and Property Acquisition

Leverage is perhaps most deeply ingrained and widely accepted in real estate investment. The primary mechanism here is the mortgage. Both residential and commercial real estate transactions heavily rely on borrowed capital.

Mortgages and Loan-to-Value (LTV) Ratios

A mortgage is a loan secured by real property. The property itself serves as collateral. Lenders assess risk based on factors such as the borrower’s creditworthiness, income, and importantly, the “loan-to-value” (LTV) ratio. The LTV ratio compares the amount of the loan to the appraised value of the property. For example, an 80% LTV mortgage on a $500,000 property means the borrower puts down $100,000 (20%) and borrows $400,000. Lower LTVs generally imply less risk for the lender and can result in more favorable interest rates.

Types of Real Estate Loans and Their Risks

• Fixed-Rate Mortgages: The interest rate remains constant for the life of the loan. This provides predictability in monthly payments but means the borrower doesn’t benefit if interest rates fall significantly after loan origination.
• Adjustable-Rate Mortgages (ARMs): The interest rate is fixed for an initial period (e.g., 3, 5, or 7 years) and then adjusts periodically based on a benchmark index (e.g., SOFR). While ARMs often offer lower initial rates, they expose the borrower to significant “interest rate risk.” If rates rise, monthly payments can increase substantially, potentially making the property unaffordable or eroding investment returns.
• Interest-Only Loans: For a specified period, the borrower only pays the interest on the principal loan amount, with no principal reduction. This leads to lower initial payments, freeing up cash flow. However, at the end of the interest-only period, payments jump significantly as principal repayment begins, or a large “balloon payment” may be due. This type of loan is riskier as it defers principal repayment, and if property values decline, the investor could find themselves with negative equity and a much larger payment suddenly due.
• Commercial Mortgages: These are typically used for income-generating properties (apartments, offices, retail). They often have shorter terms (5-10 years) and balloon payments, requiring refinancing. Commercial properties also carry additional risks such as vacancy risk, tenant default, and concentrated market risk.

Risks Specific to Real Estate Leverage

1. Negative Equity: If property values decline, especially after a high LTV loan, the amount owed on the mortgage can exceed the property’s market value. This is known as being “underwater.” It makes selling difficult without incurring a loss and still owing the bank.
2. Interest Rate Fluctuations: For ARMs or properties requiring refinancing, rising interest rates can significantly increase borrowing costs, reducing cash flow and investment profitability, potentially leading to default.
3. Liquidity Risk: Real estate is an illiquid asset. Selling a property quickly, especially in a downturn, can be challenging and may require significant price concessions. This can be problematic if cash is needed to service the debt or meet other financial obligations.
4. Vacancy Risk & Operating Expenses: For income properties, vacancies mean no rental income, but mortgage payments and other operating expenses (taxes, insurance, maintenance) continue. Unforeseen repairs or increased property taxes can also strain cash flow.
5. Leverage in Development: Using debt for property development adds construction risk, permitting risk, and market absorption risk. Delays or cost overruns can quickly turn a profitable project into a losing one, magnified by high debt loads.

Business and Corporate Debt: Fueling Growth and Acquisitions

Businesses, from small startups to multinational corporations, routinely use debt as a form of leverage to finance operations, expansion, research and development, and even acquisitions. This can range from simple bank loans to complex bond issuances.

Common Forms of Corporate Debt

• Bank Loans: Traditional term loans for specific projects or lines of credit for working capital needs. Banks assess a company’s creditworthiness, cash flow, and collateral.
• Corporate Bonds: Companies issue bonds to public or institutional investors, promising to pay interest over a period and repay the principal at maturity. Bonds can be secured or unsecured, and their interest rates depend on the company’s credit rating.
• Asset-Based Lending: Loans secured by specific assets like accounts receivable or inventory.
• Leveraged Buyouts (LBOs): A specialized transaction where a company is acquired primarily using borrowed funds. The assets of the acquired company often serve as collateral for the loans. LBOs aim to generate returns by improving the company’s operations, selling off non-core assets, or refinancing the debt after a period of stability and growth. These are typically undertaken by private equity firms and involve very high levels of leverage, making them inherently risky but potentially highly rewarding if successful.

Debt-to-Equity Ratios and Credit Ratings

A key metric for assessing corporate leverage is the debt-to-equity ratio, which compares a company’s total liabilities to its shareholder equity. A higher ratio indicates greater reliance on debt financing. Credit rating agencies (e.g., S&P, Moody’s, Fitch) assign ratings to corporate debt, reflecting the likelihood of default. Higher leverage generally leads to lower credit ratings, which increases borrowing costs and can limit access to future capital.

Risks Specific to Business/Corporate Debt

1. Bankruptcy Risk: Failure to generate sufficient cash flow to service debt payments can lead to default and ultimately bankruptcy, where creditors may seize company assets.
2. Covenant Breaches: Loan agreements often include “covenants” – specific conditions that the borrower must adhere to (e.g., maintaining certain financial ratios, not taking on additional debt without permission). Breaching a covenant can trigger a technical default, making the entire loan immediately due and payable.
3. Credit Rating Downgrades: Increased leverage or deteriorating financial performance can lead to a downgrade in the company’s credit rating, making future borrowing more expensive and potentially harder to secure.
4. Cash Flow Strain: High debt service obligations can severely restrict a company’s financial flexibility, limiting its ability to invest in growth opportunities, weather economic downturns, or innovate.

Derivative Products and Leveraged ETFs

While not direct forms of borrowing, certain financial instruments inherently embed leverage or are designed to amplify returns.

• Options and Futures: These derivatives allow investors to control a large notional value of an underlying asset with a relatively small amount of capital (premium for options, margin for futures). This inherent leverage means small price movements in the underlying asset can lead to significant percentage gains or losses on the capital invested in the derivative.
• Leveraged ETFs: These Exchange-Traded Funds use derivatives (like futures, swaps) and debt to amplify the daily returns of an underlying index or commodity. For example, a “2x leveraged S&P 500 ETF” aims to deliver twice the daily return of the S&P 500. While attractive for short-term speculation, their daily rebalancing mechanism means their long-term performance often deviates significantly from their stated multiple of the underlying index, especially in volatile or trending markets. They are generally unsuitable for buy-and-hold investors due to “volatility decay” or “compounding risk.”

These instruments, while not direct borrowing, expose investors to similar amplified risks and require a sophisticated understanding of their complex mechanics.

Cautionary Note: Personal Loans and Credit Cards for Investment

It’s generally advised to avoid using high-interest personal loans or, even worse, credit cards to finance investments. The interest rates on such forms of debt are typically exorbitant (often 15-25% or more for credit cards) and would require exceptionally high and consistent investment returns merely to break even. The risk of losing the principal investment while still being burdened with high-interest debt is immense and can lead to severe financial distress. While the temptation to “get rich quick” might arise, the financial principles strongly caution against such highly speculative and irresponsible borrowing.

The Allure: Rewards and Strategic Benefits of Borrowed Capital

Despite the inherent dangers, the strategic application of borrowed capital can offer compelling rewards and advantages to the discerning investor. When deployed judiciously, leverage can significantly enhance investment outcomes, accelerate wealth accumulation, and even improve capital efficiency.

Amplification of Returns: The Core Advantage

The most direct and often-cited benefit of leverage is its ability to magnify returns on equity. Let’s revisit our simple example:

Scenario	Investment Size	Own Capital Invested	Borrowed Capital	Asset Appreciation (Example)	Gross Asset Value	Net Equity (after repaying debt)	Return on Own Capital
No Leverage	$100,000	$100,000	$0	+10% ($10,000)	$110,000	$110,000	10%
50% Leverage	$100,000	$50,000	$50,000	+10% ($10,000)	$110,000	$60,000 ($110k – $50k loan)	20% (($60k-$50k)/$50k)

In the leveraged scenario, a 10% increase in the asset’s value translates to a 20% return on the investor’s initial equity. This assumes the cost of borrowing is less than the asset’s return. If the interest on the $50,000 loan was, say, 5% ($2,500 for the period), the net equity would be $57,500, still resulting in a 15% return on equity ($7,500 profit on $50,000 initial equity), significantly higher than the 10% unleveraged return. This accelerated compounding effect is highly attractive for investors seeking to grow their portfolio at a faster pace.

Consider a real estate investment where an investor puts down 25% of the purchase price and leverages the remaining 75% with a mortgage. If the property appreciates by 5% annually, and rental income covers expenses and debt service, the return on the investor’s initial 25% equity can be substantially higher than 5%. Over several years, this amplified growth can lead to significant wealth accumulation from a relatively smaller initial cash outlay.

Diversification Potential and Access to Larger Opportunities

Leverage can enable an investor to diversify their portfolio more effectively or access investment opportunities that would otherwise be beyond their financial reach. Without borrowing, an investor with $200,000 might only be able to purchase a single, modest property or a limited selection of securities. With leverage, that same $200,000 could serve as a down payment for a $800,000 commercial property, or allow for positions in multiple asset classes or sectors, potentially reducing idiosyncratic risk.

For example, a sophisticated investor might identify several distinct investment themes (e.g., undervalued tech companies, stable income-generating REITs, a promising private equity fund). If their own capital is insufficient to allocate meaningfully to each, carefully applied leverage could allow them to build a more robust and diversified portfolio, spreading risk across different market segments while participating in more growth opportunities. This allows for broader exposure to market opportunities and can help mitigate the impact of poor performance in a single asset or sector.

Tax Efficiency: Deductibility of Interest Payments

In many jurisdictions, the interest paid on borrowed capital used for investment purposes may be tax-deductible against investment income. This effectively reduces the net cost of borrowing and further enhances the profitability of leveraged investments. For instance, mortgage interest on investment properties is typically deductible against rental income. Similarly, interest on margin loans or securities-based loans used to purchase taxable investments can often be deducted against investment income (up to the amount of investment income).

This tax benefit can be a significant factor in the overall return calculation. By lowering the effective cost of debt, it widens the spread between the asset’s return and the borrowing cost, making the leveraged strategy more attractive. However, tax laws are complex and vary by region and type of investment, so professional tax advice is always recommended to understand specific deductibility rules.

Capital Efficiency and Liquidity Management

Leverage allows an investor to control a larger asset base while committing less of their own capital. This “capital efficiency” means that a significant portion of the investor’s personal wealth remains unencumbered, providing greater liquidity and flexibility. This freed-up capital can be used for various purposes:

• Emergency Fund: Maintaining a robust cash buffer for unforeseen personal expenses, rather than having all capital tied up in illiquid investments.
• Opportunistic Investments: Having capital available to seize new investment opportunities that arise, rather than being forced to sell existing assets (potentially at a loss) to fund new ventures.
• Diversification of Endeavors: Allowing the investor to pursue other business ventures, educational pursuits, or personal goals without liquidating investment holdings.
• Meeting Future Obligations: Ensuring cash is available for planned expenditures like children’s education, retirement needs, or large purchases.

By borrowing, investors can avoid liquidating existing, potentially high-performing assets to fund new acquisitions or needs. This allows for a more strategic and less reactive approach to overall financial management.

Exploiting Market Anomalies and Arbitrage Opportunities

For highly sophisticated investors, borrowed capital can be a tool to exploit temporary market inefficiencies or arbitrage opportunities. This often involves borrowing at a very low, secure rate and investing the funds in a higher-yielding asset with perceived minimal risk, capturing the spread. While such “pure” arbitrage opportunities are rare and fleeting in efficient markets, variations of this strategy can exist. For example, a bond investor might borrow at an ultra-low short-term rate to purchase slightly higher-yielding, short-duration government bonds, if the yield curve allows for a positive spread after accounting for borrowing costs. This is a very advanced use of leverage and typically involves institutional players with access to highly favorable borrowing terms and sophisticated risk models.

In summary, the rewards of borrowed capital, when harnessed responsibly, are undeniably appealing. They encompass the potential for magnified returns, enhanced portfolio diversification, tax advantages, and greater capital efficiency. However, these benefits are inextricably linked to the amplified risks, demanding a high degree of prudence and expertise from the leveraged investor.

The Peril: Understanding the Risks of Borrowed Capital

While the rewards of leverage are enticing, the risks are equally profound and, if unmanaged, can lead to catastrophic financial losses. The very amplification that boosts gains also accelerates losses, turning minor market fluctuations into significant personal financial setbacks. A clear-eyed assessment of these perils is non-negotiable for any investor considering the use of borrowed funds.

Amplification of Losses: The Downside Mirror

Just as positive returns are magnified, negative returns are also amplified. This is the most critical risk to understand.

Scenario	Investment Size	Own Capital Invested	Borrowed Capital	Asset Depreciation (Example)	Gross Asset Value	Net Equity (after repaying debt)	Return on Own Capital
No Leverage	$100,000	$100,000	$0	-10% ($10,000)	$90,000	$90,000	-10%
50% Leverage	$100,000	$50,000	$50,000	-10% ($10,000)	$90,000	$40,000 ($90k – $50k loan)	-20% (($40k-$50k)/$50k)

In the leveraged scenario, a 10% decline in the asset’s value results in a 20% loss on the investor’s initial equity. If we include interest costs (say, $2,500 as before), the net equity drops to $37,500, leading to a 25% loss on the initial capital. The percentage loss on your own capital grows exponentially as the leverage ratio increases.

A small market correction that would be manageable for an unleveraged portfolio can decimate a highly leveraged one. In extreme cases, if the asset value falls significantly, the investor’s equity can be entirely wiped out, and they may still owe the borrowed amount to the lender. This is often the case with margin trading where a severe market downturn can lead to your brokerage account falling into negative territory, meaning you owe the broker more money than you initially invested.

Interest Rate Risk: Rising Cost of Capital

Borrowing costs are not static. For loans with variable interest rates (like many margin loans or ARMs), or for fixed-rate loans that require refinancing, a rise in prevailing interest rates directly increases the cost of carrying the debt.

Consider an investor who took out an interest-only, adjustable-rate mortgage on an investment property when rates were historically low. If central banks raise interest rates to combat inflation, the benchmark rate to which their mortgage is tied will increase, causing their monthly interest payments to jump significantly. This can severely erode the cash flow from the property, turning a profitable venture into a money-losing one. If rental income cannot cover the increased debt service, the investor might be forced to sell the property at an inopportune time, potentially at a loss, or face foreclosure.

Similarly, for corporate borrowers, rising interest rates increase the cost of servicing existing floating-rate debt and make new debt financing more expensive, impacting profitability and growth prospects.

Liquidation Risk and Margin Calls: The Forced Exit

This risk is particularly acute in securities margin accounts. If the value of the collateral (the purchased securities) falls below the maintenance margin requirement, the brokerage issues a margin call. The investor must immediately deposit additional funds or securities to restore the equity ratio. If they fail to do so, the brokerage firm will liquidate (sell) the securities in the account to cover the loan, often without waiting for a favorable price.

During periods of high market volatility or sharp declines, margin calls can happen rapidly and unexpectedly. Investors might find themselves unable to meet the demands, especially if their capital is tied up elsewhere or they face other liquidity constraints. This forced selling can lead to a “death spiral,” where selling assets further depresses their price, triggering more margin calls, and so on, ultimately leading to the complete wipeout of the investor’s equity, and potentially owing money back to the broker if the proceeds from the forced sale are insufficient to cover the loan. Historical events, such as the Dot-Com Bubble burst or the 2008 financial crisis, saw countless investors lose fortunes due to aggressive margin calls.

Market Volatility Risk: Swift Erosion of Equity

Leverage amplifies the impact of market volatility. Even modest, short-term fluctuations in asset prices can have disproportionate effects on a leveraged portfolio. A highly volatile asset, when combined with significant leverage, becomes incredibly risky. For instance, if you’re leveraged 3:1 on a stock that experiences a sudden 15% drop, your equity could plummet by 45% or more, potentially triggering a margin call even if you believe the long-term outlook for the stock is positive.

The psychological toll of managing leveraged positions in volatile markets is also immense. The constant threat of significant losses and the pressure of potential margin calls can lead to irrational decision-making, such as panic selling at the bottom or holding on to losing positions too long in the hope of a rebound.

Liquidity Risk: Inability to Sell Quickly

Not all assets are easily convertible to cash. Real estate, private equity investments, or certain types of niche securities can be highly illiquid. If an investor uses leverage to acquire such assets and then faces a need for cash (e.g., to service debt, meet a margin call on another investment, or for personal emergencies), they might find it difficult or impossible to sell the illiquid asset quickly without incurring a significant discount or loss. This can exacerbate financial distress, forcing them to liquidate more liquid assets at unfavorable prices or even default on their loan obligations.

Concentration Risk: Putting All Eggs in One Basket

The allure of amplified returns can tempt investors to concentrate their borrowed capital into a few “high-conviction” assets or a single, large project. While this might magnify gains if the bet pays off, it dramatically increases concentration risk. If that specific asset or project underperforms or fails, the resulting loss, magnified by leverage, can be catastrophic. Diversification, while still possible with leverage, is often overlooked when investors chase outsized returns on a single idea.

Psychological Stress: The Burden of Debt

Beyond the financial risks, managing significant borrowed capital for investment purposes carries a substantial psychological burden. The constant awareness of debt obligations, the fear of market downturns, and the pressure of potential losses can lead to chronic stress, anxiety, and sleep deprivation. This emotional toll can impair judgment, leading to poor decision-making, such as taking on even more risk to recoup losses, or impulsively liquidating positions. A sound financial strategy requires a calm and rational mind, which can be severely compromised under the weight of excessive leverage.

Covenant Breaches: Technical Defaults

For larger, typically commercial or corporate loans, debt agreements often include specific “covenants” that the borrower must adhere to. These can include maintaining certain financial ratios (e.g., debt-to-EBITDA, interest coverage ratio), limits on additional borrowing, or restrictions on asset sales. A failure to meet any of these covenants, even if the borrower is still making timely interest and principal payments, can constitute a technical default. This can allow the lender to declare the entire loan immediately due and payable, potentially leading to forced asset sales or bankruptcy, even if the underlying business or property is fundamentally sound.

In conclusion, while leverage offers compelling potential for enhanced returns, it does so by magnifying exposure to market downturns, interest rate fluctuations, and liquidity constraints. The psychological stress and the ever-present threat of forced liquidation or default demand that investors approach borrowed capital with extreme caution, robust risk management, and a deep understanding of market dynamics.

Strategic Management of Leveraged Positions: Mastering the Art of Prudence

Given the dual nature of leverage – its immense power for amplification alongside its profound risks – successful leveraged investing is not merely about borrowing money. It is an art of meticulous planning, continuous monitoring, and disciplined risk management. A leveraged investor must transform from a passive capital allocator into an active steward of risk, employing a sophisticated approach to safeguard their principal while striving for enhanced returns.

Rigorous Risk Assessment and Due Diligence

Before committing any borrowed capital, an exhaustive risk assessment is paramount. This goes beyond a superficial analysis of the underlying asset.

1. Thorough Asset Analysis: For securities, this involves deep fundamental analysis, understanding industry dynamics, competitive landscape, management quality, and valuation. For real estate, it means scrutinizing location, market trends, property condition, potential rental income, and detailed expense projections. For businesses, it demands a forensic examination of cash flow, balance sheet strength, and business model viability.
2. Stress Testing the Investment: Do not assume linear returns. Instead, model worst-case scenarios. What if the asset value drops by 20%, 30%, or even 50%? What happens if interest rates jump by 2% or 3%? Can your cash flow cover the increased debt service? Will you face a margin call, and do you have sufficient reserves to meet it? This “what if” analysis is critical to understanding your breaking point and the potential downside.
3. Understanding Loan Terms and Covenants: Every detail of the borrowing agreement matters. What is the interest rate (fixed or variable)? What are the repayment terms? Are there prepayment penalties? What are the initial and maintenance margin requirements? For corporate loans, what are the financial covenants, and how are they measured? Blindly signing a loan agreement without fully comprehending its implications is an express lane to financial distress.
4. Assessing Your Personal Financial Capacity: This is crucial. How much non-investment capital do you have access to? What is your stable income stream? What is your job security? Can you comfortably service the debt even if your investment generates no income or experiences a temporary decline? Never borrow more than you can reasonably afford to repay, even if the investment goes sour.

Maintaining Conservative Leverage Ratios and Equity Buffers

The temptation to maximize leverage can be strong, but it is often a recipe for disaster. Prudent investors almost always maintain a lower leverage ratio than the maximum permitted.

1. Lower Loan-to-Value (LTV) for Real Estate: Instead of taking an 80% or 90% LTV mortgage, a conservative investor might aim for 60-70% LTV. This means a larger equity cushion, providing more resilience against property value declines before negative equity or default becomes a threat.
2. Higher Margin Equity for Securities: For margin accounts, maintaining significantly more equity than the maintenance margin requirement is a wise strategy. For example, if the maintenance margin is 25%, aiming to keep your equity at 50% or more significantly reduces the likelihood of a margin call during normal market fluctuations. This “dry powder” or cash buffer can be vital to meet margin calls without being forced to sell assets at a loss.
3. Focus on Debt Service Coverage Ratios for Income Properties: For rental properties, aim for a strong Debt Service Coverage Ratio (DSCR), ideally 1.25x or higher. This means your net operating income is at least 1.25 times your annual debt service, providing a comfortable buffer against vacancies or unexpected expenses.

The goal is to build sufficient resilience into the leveraged position to weather adverse market conditions without being forced into an unfavorable liquidation.

Diversification of Leveraged Assets

While leverage might tempt some to concentrate their holdings, intelligent use of borrowed capital should still adhere to the principles of diversification.

• Across Asset Classes: If you use leverage for real estate, consider if your other, unleveraged investments are in different asset classes like stocks, bonds, or commodities.
• Within Asset Classes: If leveraging a stock portfolio, ensure it is diversified across sectors, geographies, and company sizes. Avoid putting all your leveraged eggs into a single stock or a very narrow industry. Similarly, with real estate, consider diversifying across different property types (residential, commercial, industrial) or geographies, if feasible.
• Diversification of Lenders: For large-scale investors or businesses, having relationships with multiple lenders can provide flexibility and prevent over-reliance on a single source of capital, especially during challenging economic periods.

Diversification helps mitigate specific asset risk and reduces the likelihood that a single, unforeseen event wipes out your leveraged position.

Hedging Strategies: Mitigating Specific Risks

For advanced investors, hedging strategies can be employed to offset some of the risks associated with leveraged positions.

• Interest Rate Hedges: If concerned about rising interest rates on a variable-rate loan, an investor might consider interest rate swaps or caps to limit their exposure to rate increases.
• Currency Hedges: If leveraging an investment in a foreign currency, currency forwards or options can protect against adverse exchange rate movements.
• Portfolio Insurance: Using options (e.g., buying put options on an index or specific stocks) can provide downside protection for a leveraged stock portfolio, acting as an insurance policy against significant market declines. However, these strategies come with costs (premiums) and can be complex to implement effectively.

Hedging strategies are sophisticated and add complexity and cost, making them suitable primarily for institutional investors or highly experienced individuals.

Continuous Monitoring and Proactive Rebalancing

Leveraged positions demand constant vigilance. Set up regular review schedules for your portfolio and debt obligations.

• Market Monitoring: Stay informed about broader economic trends, sector-specific news, and the performance of your specific assets.
• Loan Term Review: Keep track of upcoming interest rate adjustments, maturity dates, and any changes in lender policies.
• Performance Review: Regularly assess whether your leveraged investments are performing as expected and generating sufficient returns to justify the cost of debt.
• Rebalancing: Just as you rebalance an unleveraged portfolio, periodically adjust your leveraged positions. If an asset has appreciated significantly, you might consider selling a portion to reduce your debt exposure and lock in profits. Conversely, if an asset has declined, you may need to add capital or reduce the leveraged position to avoid margin calls or maintain a healthy equity buffer. Proactive adjustments are always better than reactive decisions under duress.

Understanding Exit Strategies

Before entering a leveraged investment, have a clear understanding of your exit strategy. How will you eventually repay the loan or divest the asset?

• Planned Sale: If investing in real estate, consider the anticipated holding period and market conditions for a profitable sale.
• Refinancing: For long-term assets like commercial real estate, understand the refinancing options available and potential future interest rate environments.
• Debt Reduction: Plan how excess cash flow from the investment or other sources can be used to pay down the principal, reducing the leverage ratio over time.
• Tax Implications: Understand the capital gains taxes or other taxes associated with selling the leveraged asset.

A well-defined exit strategy ensures that the journey of leverage concludes with a successful realization of gains, rather than a forced or panicked liquidation.

The Importance of Interest Rates and Economic Cycles

The profitability of leveraged investing is heavily influenced by the prevailing interest rate environment and broader economic cycles.

• Low-Interest Rate Environments: Borrowing is cheaper, making it easier to generate a positive spread between asset returns and borrowing costs. This often leads to increased appetite for leverage.
• Rising Interest Rate Environments: Borrowing becomes more expensive, putting pressure on leveraged positions. Investors might seek to reduce leverage or refinance fixed-rate debt if rates fall.
• Economic Cycles: Recessions can lead to asset price declines, increasing the risk of leveraged positions. Booms can inflate asset prices, making leveraged gains seem easy, but also increasing the risk of subsequent corrections.

A macro-economic perspective is essential. Understanding the Federal Reserve’s (or other central banks’) monetary policy, inflation trends, and economic forecasts can inform decisions about when to take on or reduce leverage.

Who is Leverage For? Investor Profiles and Suitability

Not every investor is suited for the complexities and risks of borrowed capital. The judicious use of leverage requires a specific set of characteristics, knowledge, and financial capacity. Understanding who can (and should not) engage in leveraged investing is crucial for financial well-being.

Experienced and Knowledgeable Investors

Leverage is generally reserved for investors with a deep and nuanced understanding of financial markets, specific asset classes, and sophisticated risk management techniques. This includes:

• Seasoned Market Participants: Individuals who have navigated multiple market cycles, experienced both bull and bear markets, and understand how various economic factors (interest rates, inflation, GDP growth) influence asset prices.
• Specialized Knowledge: Investors who possess expert knowledge in a particular sector (e.g., technology, healthcare) or asset class (e.g., commercial real estate, private equity). This specialized insight can provide an edge in identifying undervalued assets or profitable opportunities that justify the additional risk of leverage.
• Proficient in Risk Management: They understand concepts like Value at Risk (VaR), stress testing, correlation, and diversification. They actively employ strategies to mitigate risk, rather than simply hoping for the best.
• Emotionally Disciplined: They can make rational decisions under pressure, avoiding panic selling during downturns or overly aggressive speculation during upturns. They understand the psychological toll of debt and can manage it effectively.

Leverage amplifies mistakes as much as it amplifies successes. An investor lacking experience is likely to find the learning curve too steep and too costly.

High Net Worth Individuals (HNWIs) and Institutional Investors

High net worth individuals and institutional entities are often better positioned to use leverage effectively due to several factors:

• Capital Reserves: HNWIs typically have substantial liquid assets outside of their leveraged investments. This provides a robust buffer to meet margin calls, cover debt service during lean periods, or absorb significant losses without jeopardizing their overall financial stability. They can afford to lose a portion of their investment capital without it leading to personal bankruptcy.
• Access to Favorable Terms: Due to their financial standing and volume of business, HNWIs and institutional investors (like pension funds, hedge funds, and private equity firms) often have access to lower interest rates, more flexible loan terms, and a wider range of sophisticated lending products from banks and other financial institutions.
• Professional Advice and Resources: They can afford to engage top-tier financial advisors, portfolio managers, tax specialists, and legal counsel who can provide expert guidance on structuring leveraged deals, managing risk, and optimizing tax efficiency. Institutional investors have in-house teams dedicated to these functions.
• Longer Time Horizons: Many institutional investors have very long-term investment horizons (e.g., pension funds). This allows them to ride out short-term market volatility and benefit from the long-term appreciation of assets, which is crucial for leveraged positions that need time to generate sufficient returns to justify borrowing costs.

These advantages collectively create an environment where leverage can be deployed more strategically and with greater resilience.

Investors with Stable and Predictable Income Streams

While not a direct measure of wealth, a stable, high, and predictable income stream is a significant factor in determining suitability for leverage.

• Ability to Service Debt: A consistent income ensures the ability to make regular interest and principal payments on loans, regardless of the immediate performance of the leveraged investment. This is particularly important for real estate investments with ongoing mortgage payments.
• Capacity for Replenishment: In the event of an investment loss or a margin call, a strong income stream allows the investor to replenish capital without having to sell other assets or take on additional, potentially damaging, debt.

This profile is often found in established professionals, successful entrepreneurs, or those with reliable passive income sources.

Caution Against Leverage for Novice Investors

Conversely, leverage is almost universally ill-advised for novice investors or those with limited financial resources.

• Lack of Experience: New investors often lack the intuitive feel for market movements, the discipline to stick to a strategy, or the knowledge of how to react to unexpected events.
• Insufficient Capital Buffer: Without a substantial emergency fund or readily available capital, a small market downturn can quickly lead to a margin call that cannot be met, resulting in total loss of principal and potentially owing more money than initially invested.
• Emotional Vulnerability: The psychological stress of managing borrowed capital can be overwhelming for inexperienced investors, leading to impulsive and costly decisions.
• Misunderstanding of Compounding Risks: Novices might only see the amplified gains and not fully grasp how quickly losses can mount, especially when combined with interest expenses and potential forced liquidations.

For these reasons, financial advisors almost always recommend that new investors focus on building a strong foundation with unleveraged investments, such as diversified index funds, and establish a robust emergency fund before even considering the concept of borrowed capital for investment. The pitfalls are simply too great without proper education, experience, and a solid financial cushion.

Historical Context and Case Studies: Lessons from Leveraged Investing

History is replete with examples of both the spectacular successes and the devastating failures associated with leveraged investing. Examining these events offers invaluable lessons on the power and peril of borrowed capital.

The Dot-Com Bubble (Late 1990s – Early 2000s)

During the exuberance of the late 1990s, many individual investors used margin loans to heavily invest in technology and internet stocks, which were experiencing parabolic growth. The narrative was that “this time is different,” and traditional valuation metrics were irrelevant. As stock prices soared, investors borrowed more, amplifying their gains. However, when the bubble burst in 2000, and tech stocks plummeted, those same margin accounts became liabilities. Brokerages issued massive margin calls. Many investors, unable to deposit additional funds, were forced to liquidate their holdings at rock-bottom prices, often losing not only their initial investment but also owing their brokers significant sums. The amplified losses led to widespread personal bankruptcies and financial ruin for countless individuals who succumbed to the speculative fever.

The 2008 Financial Crisis (Subprime Mortgage Meltdown)

This crisis stands as a stark reminder of the systemic risks posed by excessive and irresponsible leverage, particularly in real estate. Prior to 2008, lax lending standards led to a surge in “subprime mortgages” issued to borrowers with questionable credit histories and insufficient income. Many of these were adjustable-rate mortgages with low initial “teaser rates” that reset to much higher rates after a few years.
Investors, both individual homeowners and large financial institutions, heavily leveraged real estate. Homeowners took out large mortgages, often with minimal down payments, assuming property values would continue to rise indefinitely. Financial institutions bundled these risky mortgages into complex “mortgage-backed securities” (MBS) and “collateralized debt obligations” (CDOs), then used massive amounts of leverage to invest in these instruments. Credit rating agencies often misjudged the risk, assigning high ratings to tranches of these derivatives, further encouraging institutional investors to pile in with borrowed money.

When housing prices began to fall, many homeowners found themselves with negative equity (owing more than their home was worth) and rapidly rising mortgage payments as their ARMs reset. Defaults skyrocketed. This triggered a cascading collapse in the value of MBS and CDOs held by financial institutions, many of whom were leveraged 20:1, 30:1, or even higher. Their massive leveraged bets turned into equally massive losses, leading to the collapse of major banks (e.g., Lehman Brothers), bailouts (e.g., AIG, Bear Stearns), and a global financial crisis. It highlighted how leverage, when unchecked and intertwined, can create systemic risk that threatens the entire financial system.

Long-Term Capital Management (LTCM) (1998)

LTCM was a hedge fund founded by highly acclaimed quantitative traders and Nobel laureates in economics. They employed extremely high levels of leverage (at times over 25:1 equity-to-debt, and far higher notional leverage through derivatives) to execute complex arbitrage strategies across global markets. Their models suggested these strategies were highly unlikely to fail. However, a series of unexpected market events, particularly the 1998 Russian financial crisis, caused the correlations they relied on to break down.
Their leveraged positions moved against them, leading to staggering losses. LTCM’s massive size and interconnectedness with major banks meant its collapse posed a systemic threat. The Federal Reserve orchestrated a bailout by a consortium of major financial institutions to prevent a wider market meltdown. LTCM’s story is a classic example of how even the most brilliant minds, armed with sophisticated models, can be undone by extreme leverage when black swan events defy statistical probabilities.

Archegos Capital Management (2021)

More recently, Archegos Capital Management, a private family office, caused a multi-billion-dollar meltdown for several major global banks. Archegos used “total return swaps,” a type of derivative, to gain massive, highly leveraged exposure to certain stocks without having to disclose their positions publicly. This allowed them to build highly concentrated, multi-billion-dollar bets using relatively little capital, with banks providing the synthetic leverage.
When the prices of their concentrated holdings began to fall, the banks, who were on the other side of these swaps and held the actual shares as collateral, initiated margin calls. Archegos could not meet these demands, leading the banks to liquidate massive blocks of stock at fire-sale prices. This triggered huge losses for Credit Suisse, Nomura, and others, totaling over $10 billion. The Archegos debacle illustrated how opaque derivative structures, combined with extreme concentration and leverage, can create immense, hidden risks even in a private, unregulated family office setting, ultimately impacting sophisticated financial institutions and potentially the broader market.

These case studies underscore vital lessons:

• Leverage Amplifies Both Gains and Catastrophe: The same mechanism that can make a fortune can wipe out everything and more.
• Market Correlations Can Break Down: What seems like a diversified or hedged strategy can fail if assumed relationships between assets change.
• Unforeseen Events (Black Swans) Occur: No model can perfectly predict all market behavior or global events.
• Liquidity Matters: Being forced to sell into a falling market due to margin calls is a common theme in leveraged failures.
• Risk Management is Paramount: Even highly sophisticated investors can succumb to excessive risk-taking, often believing their models or insights are infallible.

These historical events serve as powerful deterrents against complacency and emphasize the critical need for humility, discipline, and conservative risk management when employing borrowed capital.

Ethical Considerations and Responsible Borrowing

Beyond the financial mechanics and risk management, the decision to employ borrowed capital for investment also touches upon important ethical considerations and the principles of responsible borrowing. Engaging in financially sound practices extends beyond maximizing profit; it encompasses maintaining personal financial integrity and avoiding behaviors that could lead to undue hardship for oneself or others.

Not Taking on More Debt Than One Can Reasonably Service

The cornerstone of responsible borrowing is a realistic assessment of one’s ability to service the debt, not just under optimal conditions, but also during periods of stress. This means:

• Conservative Income Projections: When calculating debt service capacity, use conservative estimates for investment income (e.g., rental income, dividends) and avoid overly optimistic projections of asset appreciation.
• Stress-Test Personal Budget: Ensure that even if the investment generates no income for a period, or if other income streams are temporarily reduced, you can still comfortably make loan payments without resorting to selling essential assets or incurring further high-interest debt.
• Distinction Between Good and Bad Debt: While investment debt can be “good debt” if it generates a return exceeding its cost, it quickly turns “bad” if the investment fails, leaving you with burdensome payments. Responsible borrowing entails understanding this distinction and preparing for the latter scenario.

The ethical obligation is to ensure that your financial decisions do not place an unreasonable burden on your current or future financial well-being, or on your family.

Avoiding Speculative “All-In” Bets

The temptation to go “all-in” on a single, high-conviction investment, especially with borrowed money, is a profound psychological trap. This often stems from a combination of overconfidence, fear of missing out (FOMO), or a desperate attempt to recoup prior losses. Responsible borrowing dictates against such highly concentrated, speculative gambles.

• Prudent Diversification: Even with borrowed capital, maintaining a diversified portfolio helps mitigate the impact of any single asset’s underperformance.
• Limiting Exposure: No single investment, especially one financed with debt, should be so large that its failure could lead to catastrophic personal financial ruin. Set clear limits on the maximum percentage of your net worth that can be exposed to a leveraged position.
• Distinguishing Investment from Gambling: Using borrowed capital to chase speculative fads or highly volatile assets without thorough due diligence crosses the line from investing into gambling, which is inherently irresponsible with borrowed funds.

Financial Literacy and Education

A fundamental ethical imperative for anyone considering leverage is to commit to continuous financial education. Ignorance of the risks is not an excuse for poor outcomes.

• Understand the Instruments: Know precisely how margin accounts, mortgages, corporate bonds, or derivatives work, including their inherent leverage and specific risks.
• Comprehend Market Dynamics: Develop a sound understanding of how interest rates, inflation, economic cycles, and geopolitical events can impact your leveraged positions.
• Learn from History: Study past financial crises and the role leverage played in them to internalize the lessons and avoid repeating past mistakes.
• Seek Professional Guidance: Do not hesitate to consult with qualified financial advisors, tax professionals, or legal counsel who specialize in leveraged investments. Their expertise can help you navigate complexities and avoid costly errors.

Responsible borrowing is an informed decision. It stems from a place of knowledge and prudence, not naive optimism or reckless speculation.

Impact on Creditors and the Broader Economy

While often viewed as an individual decision, the aggregate effect of irresponsible borrowing can have broader societal implications.

• Impact on Lenders: If a large number of borrowers default on their loans due to over-leveraging, it can strain the financial institutions that lent the money, potentially leading to credit crises and reduced lending capacity for the economy as a whole.
• Systemic Risk: As seen in 2008, widespread excessive leverage, particularly in interconnected financial markets, can create systemic risk that threatens the stability of the entire financial system and leads to economic downturns that affect everyone.

While an individual investor’s decision might seem small, a collective trend of irresponsible leverage can contribute to broader economic instability. Therefore, adopting a mindset of responsible borrowing also aligns with a more stable and resilient financial system.

Ultimately, the ethical considerations and principles of responsible borrowing boil down to one central idea: leverage is a powerful tool, not a magic bullet. Its use demands respect, discipline, and a deep sense of personal responsibility to ensure that its deployment serves long-term financial health rather than leading to short-term speculative folly and subsequent hardship.

The Future of Leveraged Investing: Evolving Landscape

The landscape of leveraged investing is continuously evolving, shaped by technological advancements, regulatory scrutiny, and the relentless innovation of financial engineers. Looking ahead, several trends are likely to influence how borrowed capital is used in investment strategies.

Role of Technology and Algorithmic Trading

Technology is transforming how leverage is accessed and managed.

• Automated Margin Management: Brokerage platforms are becoming more sophisticated, offering real-time tracking of margin levels, automated alerts for potential margin calls, and even automated rebalancing tools (though caution is still needed).
• Algorithmic Leverage Strategies: Advanced algorithms are increasingly used by quantitative hedge funds and institutional investors to identify and execute complex leveraged arbitrage opportunities with greater speed and precision than human traders. These algorithms can manage risk in real-time, though they are only as good as the data and assumptions fed into them.
• Democratization of Complex Instruments: While some highly complex derivatives remain the domain of institutional investors, platforms are making certain leveraged products (like leveraged ETFs or options) more accessible to retail investors, often without the necessary education on the inherent risks.

The challenge for the future will be ensuring that increased technological access to leverage is accompanied by enhanced investor education and robust risk warnings.

Regulatory Scrutiny and Evolving Frameworks

Following major financial crises, regulators typically increase their scrutiny of leverage across the financial system.

• Stricter Capital Requirements: Banks and financial institutions are likely to face ongoing pressure to maintain higher capital reserves and implement more stringent risk management frameworks, which can indirectly impact the availability and cost of leverage for borrowers.
• Transparency in Derivatives: The push for greater transparency in over-the-counter (OTC) derivatives markets, as seen after 2008, will likely continue to evolve. This includes requirements for central clearing and reporting of swaps, aiming to reduce systemic risk.
• Retail Investor Protections: Regulators may continue to review and potentially impose stricter rules on the availability of highly leveraged products to retail investors, or mandate more comprehensive risk disclosures. The Archegos fallout might lead to increased scrutiny on family offices and the opaque structures they use to accumulate leverage.

The aim of regulation is to reduce the likelihood of another systemic crisis driven by excessive or hidden leverage, while balancing the need for capital formation and market efficiency.

New Financial Instruments and Their Embedded Leverage

Financial innovation continues to introduce new products, many of which inherently embed leverage or facilitate its use.

• Structured Products: New variations of structured notes, credit products, and other complex instruments often use derivatives to create amplified returns or risks. Understanding the embedded leverage in these products is critical.
• Tokenized Assets and Decentralized Finance (DeFi): The nascent world of blockchain and DeFi presents new frontiers for leverage. Lending protocols on decentralized platforms allow users to borrow against their cryptocurrency holdings, often with high loan-to-value ratios and dynamic interest rates. While offering flexibility and efficiency, these platforms also introduce novel risks related to smart contract vulnerabilities, stablecoin de-pegging, and extreme volatility in crypto assets. The regulatory landscape for DeFi leverage is still very much in its infancy.
• Hybrid Investment Vehicles: We may see the emergence of more hybrid vehicles that combine traditional assets with derivative overlays or algorithmic strategies, making the level of leverage less apparent to the casual investor.

The future of leveraged investing will require investors to be more vigilant than ever in dissecting financial products to understand their true risk profile and the extent of embedded or synthetic leverage. The core principles of understanding risks and rewards remain unchanged, but the manifestation of these principles will continue to adapt to technological and financial innovation.

In conclusion, borrowed capital remains a potent tool for investment, capable of accelerating wealth creation when applied with expertise and discipline. However, its inherent amplification mechanism is a double-edged sword, magnifying not only gains but also losses, often disproportionately. Successful leveraged investing is a masterclass in risk management, demanding meticulous due diligence, conservative strategies, continuous monitoring, and robust contingency planning. It is a path best trodden by experienced, well-capitalized, and emotionally disciplined investors who understand that while the rewards can be significant, the perils are equally profound and unforgiving. Approaching leverage with humility, prudence, and a commitment to ongoing financial education is not merely a recommendation; it is an absolute imperative for navigating this complex yet potentially rewarding aspect of financial markets.

Frequently Asked Questions About Borrowed Capital for Investing

What is the primary benefit of using borrowed capital for investments?

The primary benefit, often referred to as amplification of returns, is the potential to magnify the percentage return on your own invested capital. By controlling a larger asset base with a smaller equity contribution, any positive appreciation of the asset or income generated from it, after accounting for borrowing costs, can lead to a substantially higher return on your initial investment compared to an unleveraged position.

What is a margin call, and how can it impact a leveraged investor?

A margin call is a demand from a brokerage firm for an investor to deposit additional funds or securities into their margin account when the value of the collateral (the leveraged assets) falls below a certain threshold (the maintenance margin). If the investor cannot meet the margin call, the brokerage has the right to forcefully sell some or all of the securities in the account to cover the loan, often at unfavorable prices. This can lead to rapid and substantial losses, potentially wiping out the investor’s entire equity and even leaving them owing money to the brokerage.

Is using leverage for real estate less risky than for stocks?

While real estate generally exhibits lower daily volatility compared to individual stocks, it is not inherently less risky when leveraged. Real estate leverage, typically through mortgages, involves long-term debt and exposes investors to interest rate risk (especially with adjustable-rate mortgages), liquidity risk (difficulty selling quickly), and market value fluctuations. Like stocks, if property values decline significantly, particularly after a high loan-to-value mortgage, an investor can face negative equity and the burden of substantial debt. Both asset classes present significant risks when leveraged, requiring careful due diligence and risk management.

Can I lose more than my initial investment when using borrowed capital?

Yes, absolutely. With instruments like margin accounts, if the value of the leveraged assets falls below the amount of the loan, and you are forced to sell or cannot meet a margin call, you will not only lose your initial investment but also still owe the remaining loan amount to your lender. This means your losses can indeed exceed your original capital contribution. Similarly, in real estate, if you default on a highly leveraged mortgage and the property’s sale price does not cover the outstanding loan, the lender may pursue you for the deficiency.

What is the most important factor for a successful leveraged investment strategy?

The most important factor is rigorous risk management and a deep understanding of both the underlying asset and the terms of the borrowed capital. This includes comprehensive due diligence, stress-testing potential outcomes (especially worst-case scenarios), maintaining conservative leverage ratios with ample equity buffers, continuous monitoring of market conditions and loan terms, and having a clear contingency plan for adverse events, such as a substantial cash reserve to meet margin calls or cover unexpected expenses.