Leverage

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Financial Times  Mar 31  Comment 
Eaton Vance says company owners are seeking – and increasingly being granted – extra freedom to pile on more debt without recourse to existing lenders
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SeekingAlpha  Mar 19  Comment 
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DailyFinance  Mar 14  Comment 
Intelsat S.A. (NYSE: I), the world’s leading provider of satellite services, announced today that Michael McDonnell, Executive Vice President and Chief Financial Officer, will present at the Goldman Sachs TMT Leveraged...
The Economic Times  Mar 6  Comment 
"The time to buy was when the index was crashing actually. The time, I do not think, has gone completely, but midcaps have not done too well in this rally, thus far."
Wall Street Journal  Mar 3  Comment 
No way, most advisers say. But researchers at one firm suggests they can be valuable in small doses.




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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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