Leverage is simply borrowing money to finance an investment purchase, with the goal of achieving a greater profit. It is probably easy for you to see how you can use a mortgage loan to acquire home ownership. It may not be very clear as to how investment instruments can help you in achieving the same goal.

Greater returns come with greater risk. If an investor uses leverage to make an investment and the investment moves against him, the losses is much greater than not been leveraged. Leverage can magnify both your gains and your losses. You can use leverage to trade and generate wealth with greater return, but if it fails to do so, the losses also can be greater than without. However, as the upside potential is exacerbated with leverage and so is the downside risk. Choose your investment instruments wisely as not to use too much leverage until you become proficient in using that financial instrument.

However, achieving more profits by leveraging can be created through the use of options, margins, futures and many other financial instruments.

Leverage with Options - Buying 100 shares of ABC Inc. stocks at $100 per share; you would have invested $10,000. However to increase your leverage, you can invest the $10,000 in ten options contracts and you would then control 1,000 shares instead of just 100. That is 10 times the leverage and it can help the investor to achieve greater returns and hence achieving investments objective much sooner. Futures and foreign exchange markets provide even higher investments leverage.

Leverage with Margin - Buying stocks without having the entire money to do it. The exchanges have an institutionalized method of buying stocks without having the capital through the futures market. The percentage of margin funding may range between 50-90 per cent, depending on the broker and his relationship with the client. The broker usually funds his line of credit from a bank and keeps the shares in his account with all the profit or losses going to the client.

Leverage with Futures – Futures Contracts or simply futures are legally binding agreement made between two parties to buy or sell a commodity or financial instrument, at an agreed price, on a specified date in the future. The exchange’s clearinghouse acts as counter party on all contracts, sets margin requirements, etc. Initial margin are only required by both buyer and seller. It will represent the profit and losses on that future contract; as such profits are being leveraged on the usage of margins.

In becoming acquainted with the type of investment markets, it is useful to have a general understanding of how it works and who the markets participants, what they are doing are and why. As past performance is not necessarily indicative of future results, there is risk of losses in stocks, futures and options trading.

Many online brokers offer traders to open a virtual account so you may practice and sharpen your trading skill, do make full use of it. Fund your account only if you can double up your virtual account. If you can’t double up on paper you are not going to double up on you real account. It takes time and patience to develop the skill to become a proficient trader.

“Taking higher risks, such as borrowing to invest or investing in shares rather that interest bearing securities, should, over time, magnify your returns” - Paul Clitheroe

Popularity: 35% [?]

Don't want to miss a thing? Subscribe to my RSS feed!




You Should Also Check Out This Post:

More Active Posts: