Leverage

RECENT NEWS
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.
New York Times  Jul 7  Comment 
Leveraged lending guidelines are a case study in how hard it is to stamp out what are deemed risky practices and how regulation can lead to unexpected consequences.
Financial Times  Jul 6  Comment 
Lower-income households may be at risk of default despite efforts to dampen mortgage demand
Forbes  Jun 29  Comment 
In the second quarter of 2015 the window for opportunistic leveraged loan executions reopened amid a more buoyant market tone.
Forbes  Jun 26  Comment 
In 2013, Rep. Mick Mulvaney (R-SC) toured the factory of Ajax Rolled Ring and Machine which manufactures steel rings used in construction equipment and power turbines.
Financial Times  Jun 11  Comment 
Matthew Klein on how euro membership has left the country vulnerable




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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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