Leverage

RECENT NEWS
Forbes  Aug 16  Comment 
The recent rise in LIBOR rates, which have reached levels not seen since 2009, is poised to add incremental yield on roughly 24% of loans in the S&P/LSTA Leveraged Loan 100 Index, as contracts in leveraged loans reset in the coming months.
SeekingAlpha  Aug 15  Comment 
Forbes  Aug 3  Comment 
With two issuers defaulting in July—C&J Energy Services and Transtar— the U.S. leveraged loan default rate reached a 16-month high of 2.17%, up from 1.97% at the end of June, according to the S&P/LSTA Leveraged Loan Index.
The Economic Times  Aug 2  Comment 
An LBO is a deal where the acquiring company funds the debt it raises for the acquisition using cash flow of the acquired entity.
Financial Times  Jul 29  Comment 
Regulators say borrowers may struggle if economic conditions worsen or interest rates increase
Forbes  Jul 18  Comment 
There is life in the new-issue U.S. leveraged finance market for the first time since the U.K. Brexit vote, thanks largely to a rapidly accelerating leveraged loan segment that is seeing opportunistic issuers come off the sidelines.
SeekingAlpha  Jul 17  Comment 
Forbes  Jul 15  Comment 
U.S. leveraged loan funds recorded a net inflow of $136 million in the week ended July 13, according to the Lipper weekly reporters only. This is the first infusion of cash to the asset class after four weeks of outflows totaling $700 million.




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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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