Leverage

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SeekingAlpha  Jul 10  Comment 
By Musings of a Banker: Levered Returns Cash Flow Model A price target of approximately $53 was concluded using Levered Returns three-year projection model which implies Kellogg (K) is trading at around a 20% premium. An Enterprise Value...
newratings.com  Jul 9  Comment 
LONDON (dpa-AFX) - British life and health insurer Aviva Plc.(AV.L, AV) said that it reiterated its deleveraging targets. It aims to reduce the intercompany loan balance to 2.2 billion pounds by the end of 2015; to reduce the gross external...
SeekingAlpha  Jul 8  Comment 
By Musings of a Banker: Levered Returns Cash Flow Model I'm concluding a price target of $51.18 using Levered Returns' three-year projection model which implies General Mills (GIS) is trading at around a 3.5% premium to its latest trading...
Wall Street Journal  Jul 6  Comment 
The quiet that has enveloped the stock market in recent months has been a boon to these much-criticized funds.
SeekingAlpha  Jun 27  Comment 
By Herve van Caloen: When debt burdens become too large, deleveraging must happen. Such deleveraging is painful as it implies austerity and hardship. That's why it doesn't happen often. Debt binges tend to be followed by long, painful years of...
Forbes  Jun 26  Comment 
Cash outflows for bank loan funds climbed slightly to $424 million in the week ended June 25, from $369 million last week, but were well below the $1.2 billion two weeks ago, according to Lipper.
MarketWatch  Jun 25  Comment 
A June 25 article by MarketWatch misstated incorrectly the subject of a Federal Reserve report to the Financial Stability Oversight Council. The article also misspelled last name of KBW analyst Brian KleinhanzL
SeekingAlpha  Jun 25  Comment 
By Calafia Beach Pundit: In a post three months ago, "The end of deleveraging," I noted signs that households' risk pendulum had stopped swinging in the direction of risk-aversion, and that the public was beginning to embrace risk rather than...




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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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