trading on the equity

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Trading on the Equity

The practice of borrowing capital in order to increase the cash one has available to invest. For example, if one has $50,000 to invest and an investment vehicle has a minimum investment of $100,000, one may borrow an additional $50,000. In order for trading on the equity to be worth the effort, the return on the investment must exceed the interest on the loan.

trading on the equity

The use of borrowed money to increase the return on an investor's capital. Suppose an investor is able to borrow 50% of the funds required for a $10,000 investment that returns 16% annually. If interest on the loan is 6%, the investor can earn $1,600 ($10,000 at 16%) minus interest of $300 ($5,000 at 6%), or $1,300 on an investment of $5,000 ($10,000 minus $5,000 borrowed), for a return of 26% ( $1,300/$5,000 ).