Leverage

RECENT NEWS
Forbes  Jun 20  Comment 
Leveraged finance issuance cooled considerably last week ahead of the Brexit vote in the U.K. and a Fed announcement in the U.S., and on the heels of a surge of activity in both the high yield bond and leveraged loan markets the previous week.
MarketWatch  Jun 17  Comment 
Investors must understand volatile leveraged ETFs before they buy, writes Chuck Jaffe.
TechCrunch  Jun 15  Comment 
 Uber, fresh off $3.5 billion from the Saudi Arabia Public Investment Fund, is in talks to close another $1-2 billion in the form of leveraged loans. Over the last 24 hours, the term “leveraged loans” has been thrown around a lot, but few in...
New York Times  Jun 14  Comment 
The ride-hailing company could issue $2 billion in loans, a fund-raising gambit that would not alter its valuation or dilute investors.
The Economic Times  Jun 14  Comment 
Banks have been given the option of converting the unsustainable debt, which cannot be serviced with cash flow, into equity.
Forbes  Jun 13  Comment 
The U.S. leveraged finance market shifted into an even higher gear last week as junk bond and leveraged loan issuers continue take advantage of borrower-friendly conditions, combining for $29.4 billion in new issuance.
Forbes  Jun 6  Comment 
U.S. leveraged finance issuance slipped to $14.4 billion last week as the leveraged loan market remained busy, though the high yield bond market slowed after a torrid period of activity the previous week.
MarketWatch  Jun 6  Comment 
The SEC is moving to limit them, citing 76-year-old restrictions on how much mutual funds can use potentially risky borrowing to try to juice returns.
Financial Times  May 23  Comment 
Banks are making fewer risky loans. Regulators cannot take all the credit




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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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