Leverage

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Forbes  Aug 17  Comment 
The default rate of the S&P/LSTA Leveraged Loan Index will increase to 1.27% by principal amount next month, from 1.17%, when Samson Resources via Samson Investment Company files for bankruptcy, tripping a default on its second-lien secured...
The Economic Times  Aug 3  Comment 
"Global scares will surface from time to time, India with it's stable government & improved forex reserves will cushion itself effectively."
The Economic Times  Jul 31  Comment 
The Wenzhou prosecutor said it had approved the arrest of seven people after more than six months of investigations.
Daily FX  Jul 30  Comment 
What could eventually turn sentiment: Fed hike; China financial or economic trouble; a reversal of capital flows into the emerging markets?
Forbes  Jul 24  Comment 
The U.S. leveraged loan market saw $19.1 billion of new deals issued during the week, the most since Sept. 2014, as a handful of marquee transactions set the pace for a market that is kicking into higher gear.




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Leverage is the use of margin to increase the potential return of an investment. Leverage can also mean the amount of debt a company uses to finance operations. A company with lots of debt and little equity is classified as highly leveraged.

In the securities business, brokers will typically lend 50 percent of the value of stock to be purchased. Some stocks, who may be viewed as exceptionally risky, may not be eligible for margin purchase; the broker will not lend out funds to purchase those securities.

For example, say you buy $1,000 worth of stock in company ABC at $100 per share. You have a total of 10 shares in company ABC. If you wanted to leverage your $1,000 to increase the potential return on your investment, instead of buying stock in ABC you could buy 4 option contracts at $2.50 each ($2.50 x 100 = $250) and control 400 shares instead of just 10 shares. Keep in mind that both risk and reward are magnified with leverage.

When the leveraged securities in the account begin to witness losses, the broker may issue a margin call. When the value of the equity gets close to the value of the loan, the broker will notify the investor that he needs to add more collateral in the form of cash or more securities. If the investor does not meet the margin call, the broker will sell the equities in the account to pay himself back, and give the rest to the investor. This may cause a problem to the investor. The stock may be depressed, poised to come back, but he is forced to transact. This is why holding leveraged positions is risky and is detrimental to some investing strategies.

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