Leverage

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SeekingAlpha  2 hrs ago  Comment 
By Harry Long: Does broadly shorting inverse leveraged ETPs work? The available data shows that randomly shorting leveraged inverse ETPs might perform well in certain time periods and horribly in others. So the simple answer is that one would...
Forbes  Aug 14  Comment 
Cash outflows from bank loan funds were more than halved this week, falling to $687 million in the week ended Aug. 13, from $1.5 billion the week prior, according to Lipper. The influence of bank-loan ETFs diminished during the week, to 7% of the...
SeekingAlpha  Aug 8  Comment 
By Russ Koesterich: For several years, media headlines have been filled with references to a mythical "deleveraging," or a reduction in the level of U.S. debt. In reality, U.S. non-financial debt has increased, and this has real long-term...
Forbes  Aug 7  Comment 
Cash outflows from bank loan funds nearly quadrupled this week, rising to $1.5 billion in the week ended Aug. 6, from just $406 million the prior week, according to Lipper. And the influence of bank-loan ETFs grew during the week, to 14% of the...
Reuters  Aug 5  Comment 
Wall Street banks have found a U.S. review of their junk-rated loans to have yielded similar results to last year, easing some concern among bankers about a crackdown on one of their most lucrative businesses.
Financial Times  Jul 23  Comment 
The revival in the European market for leveraged loans is causing concern over the use of ‘financial engineering’ to generate returns
Forbes  Jul 22  Comment 
Many expected the credit crisis of 2008 to have a profound impact on the regulation of leveraged loans, however, this hasn't been the case to date.
Forbes  Jul 21  Comment 
From stories in the popular press to dire analytical reports to pronouncements from Federal Reserve Chair Janet Yellen to statements from the OCC, a growing chorus is warning of a bubble in the leveraged loan market. Driven in part by the...




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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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