Borrowed Capital

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DEFINITION

Funds borrowed from either individuals or institutions. Borrowed capital can be used in a number of ways. Investors use borrowed capital to increase their potential investment returns; this use is known as leverage. The upside of investing with borrowed capital is the potential for greater percentage gains; the downside is the potential loss of someone else's money, which must then be repaid. Another way borrowed capital can be used is by businesses as a loan or debenture.

Also referred to as "loan capital."

INVESTOPEDIA EXPLAINS

Investors commonly use borrowed capital when trading in the forex markets. Critics consider this leveraged trading to be dangerous, while proponents argue that with the proper precautions, such as the placing of stops, investors can achieve their goals faster without taking on too much risk.

People who take out a mortgage to buy a home are also using borrowed capital. In this case, the purpose of borrowing capital is not necessarily to improve potential investment returns, but to make it possible to purchase an expensive asset that is difficult to pay for in one lump sum.


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