SlideShare a Scribd company logo
By: www.ProfitableInvestingTips.com
There are ways to magnify your investment gains in the
stock, currency, and futures markets. This approach
has to do with creating leverage for your investing or
trading capital. The rewards of using investment
leverage can be impressive. However, the dangers of
investment leverage are such that one needs to
proceed with caution. Success comes from using
leverage in very carefully chosen situations.
Investment disaster comes from letting greed drive
your investment decisions.
What Is Investment Leverage?
There are three common leveraged investing
strategies. One is borrowing from a broker and
trading on margin. Another is by trading options. A
third is when one invests in a security that uses
leverage such as a leverage ETF. All these approaches
can be profitable in the right hands. The basic issue is
that with the potential for multiplied gains there
comes the risk of multiplied loss. A good rule of
thumb when using investment leverage is to never put
at risk more than you can afford to lose.
Trading on Margin for Leverage
A common approach to trading stocks, futures, or
currencies is to put money into a margin account with
a broker. That account acts as collateral. The trader can
then borrow from the broker in order to buy stocks or
“sell short.” The trader pays interest on the loan. When
this works out well the trader is essentially using
someone else’s money and thus leveraging their own
trading capital.
If the trade goes badly, money is owed by the margin
account. If the amount of loss in a trade exceeds the
size of the margin account the trader receives a
“margin call” telling them that they need to put more
money into their margin account. If they cannot do
that the broker takes over the trade and takes whatever
assets are remaining.
Trading Options for Leverage
In the options market one buys or sells call or put
contracts. Calls provide the buyer with the right to buy
a stock at the contract price no matter how high the
price subsequently climbs. Puts confer the right to sell
at the contract price no matter how low the market
price falls. Those who sell these contracts are obliged
to sell in the case of a call and buy in the case of a put.
Thus, the seller is paid a premium for taking on the
risk and the buyer pays a premium for an opportunity.
Risks When Buying Calls or Puts
When a trader buys a call on a stock they are paying
much less than if they had purchased the same
amount of stock. If the price goes up in the case of a
call or down in the case of a put, they can exit the
contract with a profit similar to if they had bought and
then sold or sold and then repurchased.
This is the leverage part. For a lot less money the trader
can get roughly the same profit. The risk in this case is
that the stock will not go up or down in price as
anticipated. However, the risk is limited to the cost of
the option contract.
Risks When Selling Calls or Puts
Sellers of options get money up front. This is the sum
total of their profit. They retain that profit if the stock
in question does not move up or down, contrary to
their expectations. The leverage part is that they do
not need to pay any money to own the stock to start
this trade. They are taking on risk.
Thus, the seller of an option contract can gain a nice
premium while not investing any money! The risk is
that the stock in question not only goes up or down
contrary to their expectations. It goes up or down
dramatically which can create monumental losses.
There have been cases where investment banks have
gone out of business due to the actions of a single
trader selling ill-advised calls or puts.
Leveraged ETFs
In the cases of trading on margin and options trading
the trader or investor has their fate in their own hands.
In the case of leveraged ETFs an investor is trusting
someone else. These investments work like margin
accounts where profit may be two, three, or more
times normal. And losses follow the same multiple.
These vehicles are generally designed to create profits
within a trading day.
This is sort of like investing in a day trader. These
investment vehicles do not perform over time the same
as the underlying stock or index that they are tracking.
These are very risky investments best left to those with
the capital to absorb big losses and the time and
expertise to track their performance every moment of
every day!
Don’t Invest If You Don’t Understand
We frequently mention that successful long term
investors like Warren Buffett never invest in a company
unless they fully understand what they do to make
money. And they never invest until they are certain
that the company’s business plan will continue to
generate profits well into the future. Using this sort of
conservative investment philosophy it could be
possible to increase one’s profits by using leverage.
Sadly, far too many novice investors fall prey to greed
and use leverage with investing and trading vehicles
that they do not understand. They employ this
approach to stocks, currency pairs, or commodity
futures where they do not have the necessary
knowledge or skills. The bottom line of this little
lesson is this. Don’t invest if you don’t understand
exactly what you are dealing with and what you are
doing in any investment and this includes using
leverage.
For more insights and useful information about
investments and investing, visit
www.ProfitableInvestingTips.com.

More Related Content

Similar to Dangers of Investment Leverage

Forex secrets 2ja9z
Forex secrets 2ja9zForex secrets 2ja9z
Forex secrets 2ja9z
dblbu3
 

Similar to Dangers of Investment Leverage (20)

Forex Secrets And The Art of Buying and Selling...
Forex Secrets And The Art of Buying and Selling...Forex Secrets And The Art of Buying and Selling...
Forex Secrets And The Art of Buying and Selling...
 
Investing in the Stock Market.pdf
Investing in the Stock Market.pdfInvesting in the Stock Market.pdf
Investing in the Stock Market.pdf
 
Forex Secrets and the Art of Buying and Selling Any Commodity.pdf
Forex Secrets and the Art of Buying and Selling Any Commodity.pdfForex Secrets and the Art of Buying and Selling Any Commodity.pdf
Forex Secrets and the Art of Buying and Selling Any Commodity.pdf
 
Forex Secrets - improved business booster
Forex Secrets - improved business booster Forex Secrets - improved business booster
Forex Secrets - improved business booster
 
Binary Option Trading Education
Binary Option Trading EducationBinary Option Trading Education
Binary Option Trading Education
 
FIRE ALL FINANCIAL ADVISORS
FIRE ALL FINANCIAL ADVISORSFIRE ALL FINANCIAL ADVISORS
FIRE ALL FINANCIAL ADVISORS
 
Financial derivatives
Financial derivativesFinancial derivatives
Financial derivatives
 
Forex secrets
Forex secrets Forex secrets
Forex secrets
 
security trading.pdf
security trading.pdfsecurity trading.pdf
security trading.pdf
 
Create a system to trade breakouts by Steve Spencer
Create a system to trade breakouts by Steve SpencerCreate a system to trade breakouts by Steve Spencer
Create a system to trade breakouts by Steve Spencer
 
Forex secrets and the art of buying and selling any commodity
Forex secrets and the art of buying and selling any commodityForex secrets and the art of buying and selling any commodity
Forex secrets and the art of buying and selling any commodity
 
Stock Market Investing and mutual funds.
Stock Market Investing and mutual funds.Stock Market Investing and mutual funds.
Stock Market Investing and mutual funds.
 
Forex secrets 2ja9z
Forex secrets 2ja9zForex secrets 2ja9z
Forex secrets 2ja9z
 
How Wealthy People Use Professional Money Management
 How Wealthy People Use Professional Money Management How Wealthy People Use Professional Money Management
How Wealthy People Use Professional Money Management
 
fxreviews.best-What are Derivatives.pdf
fxreviews.best-What are Derivatives.pdffxreviews.best-What are Derivatives.pdf
fxreviews.best-What are Derivatives.pdf
 
Conventional Investing vs. Investing the tastytrade Way
Conventional Investing vs. Investing the tastytrade WayConventional Investing vs. Investing the tastytrade Way
Conventional Investing vs. Investing the tastytrade Way
 
Six Tips from the Richest Man in the world warren buffett
Six Tips from the Richest Man in the world  warren buffettSix Tips from the Richest Man in the world  warren buffett
Six Tips from the Richest Man in the world warren buffett
 
8 ways to profit with covered calls
8 ways to profit with covered calls8 ways to profit with covered calls
8 ways to profit with covered calls
 
Guide to Binary Options Trading
Guide to Binary Options TradingGuide to Binary Options Trading
Guide to Binary Options Trading
 
Margin Trading
Margin TradingMargin Trading
Margin Trading
 

More from InvestingTips

More from InvestingTips (20)

When to Buy and When to Sell Bitcoin
When to Buy and When to Sell BitcoinWhen to Buy and When to Sell Bitcoin
When to Buy and When to Sell Bitcoin
 
Are Private Digital Tokens On Their Way Out?
Are Private Digital Tokens On Their Way Out?Are Private Digital Tokens On Their Way Out?
Are Private Digital Tokens On Their Way Out?
 
Will Northrup Grumman Go Into Commercial Aviation?
Will Northrup Grumman Go Into Commercial Aviation?Will Northrup Grumman Go Into Commercial Aviation?
Will Northrup Grumman Go Into Commercial Aviation?
 
How Would a Crypto Privacy Pool Work?
How Would a Crypto Privacy Pool Work?How Would a Crypto Privacy Pool Work?
How Would a Crypto Privacy Pool Work?
 
How CFTC Rules Protected a Crypto Business
How CFTC Rules Protected a Crypto BusinessHow CFTC Rules Protected a Crypto Business
How CFTC Rules Protected a Crypto Business
 
Blockchain Tech in the Wake of Crypto Winter
Blockchain Tech in the Wake of Crypto WinterBlockchain Tech in the Wake of Crypto Winter
Blockchain Tech in the Wake of Crypto Winter
 
Economic and Investment Risks for 2024
Economic and Investment Risks for 2024Economic and Investment Risks for 2024
Economic and Investment Risks for 2024
 
Can Stablecoins Be Self-regulating?
Can Stablecoins Be Self-regulating?Can Stablecoins Be Self-regulating?
Can Stablecoins Be Self-regulating?
 
Bitcoin Viability As a Long Term Investment
Bitcoin Viability As a Long Term InvestmentBitcoin Viability As a Long Term Investment
Bitcoin Viability As a Long Term Investment
 
Bitcoin Versus NFTs
Bitcoin Versus NFTsBitcoin Versus NFTs
Bitcoin Versus NFTs
 
Would a Digital Dollar Hurt Banks?
Would a Digital Dollar Hurt Banks?Would a Digital Dollar Hurt Banks?
Would a Digital Dollar Hurt Banks?
 
Will 2024 Be a Good Year for Crypto?
Will 2024 Be a Good Year for Crypto?Will 2024 Be a Good Year for Crypto?
Will 2024 Be a Good Year for Crypto?
 
Should You Diversify Your Crypto Investments?
Should You Diversify Your Crypto Investments?Should You Diversify Your Crypto Investments?
Should You Diversify Your Crypto Investments?
 
Obligations of a Crypto Business
Obligations of a Crypto BusinessObligations of a Crypto Business
Obligations of a Crypto Business
 
Does Crypto Finance Terrorism?
Does Crypto Finance Terrorism?Does Crypto Finance Terrorism?
Does Crypto Finance Terrorism?
 
Are Smart Contracts Legal?
Are Smart Contracts Legal?Are Smart Contracts Legal?
Are Smart Contracts Legal?
 
Can the Law Fix Crypto’s Problems?
Can the Law Fix Crypto’s Problems?Can the Law Fix Crypto’s Problems?
Can the Law Fix Crypto’s Problems?
 
Apple as a Model for Crypto’s Future
Apple as a Model for Crypto’s FutureApple as a Model for Crypto’s Future
Apple as a Model for Crypto’s Future
 
Are Crypto Infrastructure Investments Safe Bets?
Are Crypto Infrastructure Investments Safe Bets?Are Crypto Infrastructure Investments Safe Bets?
Are Crypto Infrastructure Investments Safe Bets?
 
Who Gets to Vote in Crypto?
Who Gets to Vote in Crypto?Who Gets to Vote in Crypto?
Who Gets to Vote in Crypto?
 

Recently uploaded

PEACE BETWEEN ISRAEL AND PALESTINE REQUIRES EXTREMISTS OUT OF POWER AND RESTR...
PEACE BETWEEN ISRAEL AND PALESTINE REQUIRES EXTREMISTS OUT OF POWER AND RESTR...PEACE BETWEEN ISRAEL AND PALESTINE REQUIRES EXTREMISTS OUT OF POWER AND RESTR...
PEACE BETWEEN ISRAEL AND PALESTINE REQUIRES EXTREMISTS OUT OF POWER AND RESTR...
Faga1939
 
R$ 78 milhões: Estado aprova 593 propostas para acordos diretos de precatórios
R$ 78 milhões: Estado aprova 593 propostas para acordos diretos de precatóriosR$ 78 milhões: Estado aprova 593 propostas para acordos diretos de precatórios
R$ 78 milhões: Estado aprova 593 propostas para acordos diretos de precatórios
Maurílio Júnior
 

Recently uploaded (20)

Textile Waste In India | Textile Waste Management
Textile Waste In India | Textile Waste ManagementTextile Waste In India | Textile Waste Management
Textile Waste In India | Textile Waste Management
 
2024 - Love and Madness - a book about love, madness, heartbreak and politics
2024 - Love and Madness - a book about love, madness, heartbreak and politics2024 - Love and Madness - a book about love, madness, heartbreak and politics
2024 - Love and Madness - a book about love, madness, heartbreak and politics
 
role of women and girls in various terror groups
role of women and girls in various terror groupsrole of women and girls in various terror groups
role of women and girls in various terror groups
 
23052024_First India Newspaper Jaipur.pdf
23052024_First India Newspaper Jaipur.pdf23052024_First India Newspaper Jaipur.pdf
23052024_First India Newspaper Jaipur.pdf
 
24052024_First India Newspaper Jaipur.pdf
24052024_First India Newspaper Jaipur.pdf24052024_First India Newspaper Jaipur.pdf
24052024_First India Newspaper Jaipur.pdf
 
Embed-4-3 (1).pdf cvxx'f['df[p'lf][l][fl][fl][][l[
Embed-4-3 (1).pdf cvxx'f['df[p'lf][l][fl][fl][][l[Embed-4-3 (1).pdf cvxx'f['df[p'lf][l][fl][fl][][l[
Embed-4-3 (1).pdf cvxx'f['df[p'lf][l][fl][fl][][l[
 
Mizzima Weekly Analysis & Insight Issue 1
Mizzima Weekly Analysis & Insight Issue 1Mizzima Weekly Analysis & Insight Issue 1
Mizzima Weekly Analysis & Insight Issue 1
 
Dominican American Coalition PAC Executive Summary
Dominican American Coalition PAC Executive SummaryDominican American Coalition PAC Executive Summary
Dominican American Coalition PAC Executive Summary
 
Nika Muhl Visa Approval Shirt, Nika Muhl Visa Approval T-Shirt
Nika Muhl Visa Approval Shirt, Nika Muhl Visa Approval T-ShirtNika Muhl Visa Approval Shirt, Nika Muhl Visa Approval T-Shirt
Nika Muhl Visa Approval Shirt, Nika Muhl Visa Approval T-Shirt
 
Minnesota Timberwolves Bring Ya Ass T Shirt
Minnesota Timberwolves Bring Ya Ass T ShirtMinnesota Timberwolves Bring Ya Ass T Shirt
Minnesota Timberwolves Bring Ya Ass T Shirt
 
Embed-3-1-1.pdf The ECI direction on April 2, 2024 can be read here:
Embed-3-1-1.pdf  The ECI direction on April 2, 2024 can be read here:Embed-3-1-1.pdf  The ECI direction on April 2, 2024 can be read here:
Embed-3-1-1.pdf The ECI direction on April 2, 2024 can be read here:
 
PEACE BETWEEN ISRAEL AND PALESTINE REQUIRES EXTREMISTS OUT OF POWER AND RESTR...
PEACE BETWEEN ISRAEL AND PALESTINE REQUIRES EXTREMISTS OUT OF POWER AND RESTR...PEACE BETWEEN ISRAEL AND PALESTINE REQUIRES EXTREMISTS OUT OF POWER AND RESTR...
PEACE BETWEEN ISRAEL AND PALESTINE REQUIRES EXTREMISTS OUT OF POWER AND RESTR...
 
Have A Complimentary Cheat Sheet, On Us!!!
Have A Complimentary Cheat Sheet, On Us!!!Have A Complimentary Cheat Sheet, On Us!!!
Have A Complimentary Cheat Sheet, On Us!!!
 
Embed-4-1-1.pdf vm ;sdkp[kdp[kpdkpodp;p;j
Embed-4-1-1.pdf vm ;sdkp[kdp[kpdkpodp;p;jEmbed-4-1-1.pdf vm ;sdkp[kdp[kpdkpodp;p;j
Embed-4-1-1.pdf vm ;sdkp[kdp[kpdkpodp;p;j
 
Meta_AI_ads_investigation.pdfldoljjwejolejolol
Meta_AI_ads_investigation.pdfldoljjwejolejololMeta_AI_ads_investigation.pdfldoljjwejolejolol
Meta_AI_ads_investigation.pdfldoljjwejolejolol
 
May 2024 - Crypto Market Report_FINAL.pdf
May 2024 - Crypto Market Report_FINAL.pdfMay 2024 - Crypto Market Report_FINAL.pdf
May 2024 - Crypto Market Report_FINAL.pdf
 
21052024_First India Newspaper Jaipur.pdf
21052024_First India Newspaper Jaipur.pdf21052024_First India Newspaper Jaipur.pdf
21052024_First India Newspaper Jaipur.pdf
 
25052024_First India Newspaper Jaipur.pdf
25052024_First India Newspaper Jaipur.pdf25052024_First India Newspaper Jaipur.pdf
25052024_First India Newspaper Jaipur.pdf
 
27052024_First India Newspaper Jaipur.pdf
27052024_First India Newspaper Jaipur.pdf27052024_First India Newspaper Jaipur.pdf
27052024_First India Newspaper Jaipur.pdf
 
R$ 78 milhões: Estado aprova 593 propostas para acordos diretos de precatórios
R$ 78 milhões: Estado aprova 593 propostas para acordos diretos de precatóriosR$ 78 milhões: Estado aprova 593 propostas para acordos diretos de precatórios
R$ 78 milhões: Estado aprova 593 propostas para acordos diretos de precatórios
 

Dangers of Investment Leverage

  • 2. There are ways to magnify your investment gains in the stock, currency, and futures markets. This approach has to do with creating leverage for your investing or trading capital. The rewards of using investment leverage can be impressive. However, the dangers of investment leverage are such that one needs to proceed with caution. Success comes from using leverage in very carefully chosen situations. Investment disaster comes from letting greed drive your investment decisions.
  • 3.
  • 4. What Is Investment Leverage?
  • 5. There are three common leveraged investing strategies. One is borrowing from a broker and trading on margin. Another is by trading options. A third is when one invests in a security that uses leverage such as a leverage ETF. All these approaches can be profitable in the right hands. The basic issue is that with the potential for multiplied gains there comes the risk of multiplied loss. A good rule of thumb when using investment leverage is to never put at risk more than you can afford to lose.
  • 6. Trading on Margin for Leverage
  • 7. A common approach to trading stocks, futures, or currencies is to put money into a margin account with a broker. That account acts as collateral. The trader can then borrow from the broker in order to buy stocks or “sell short.” The trader pays interest on the loan. When this works out well the trader is essentially using someone else’s money and thus leveraging their own trading capital.
  • 8. If the trade goes badly, money is owed by the margin account. If the amount of loss in a trade exceeds the size of the margin account the trader receives a “margin call” telling them that they need to put more money into their margin account. If they cannot do that the broker takes over the trade and takes whatever assets are remaining.
  • 10. In the options market one buys or sells call or put contracts. Calls provide the buyer with the right to buy a stock at the contract price no matter how high the price subsequently climbs. Puts confer the right to sell at the contract price no matter how low the market price falls. Those who sell these contracts are obliged to sell in the case of a call and buy in the case of a put. Thus, the seller is paid a premium for taking on the risk and the buyer pays a premium for an opportunity.
  • 11. Risks When Buying Calls or Puts
  • 12. When a trader buys a call on a stock they are paying much less than if they had purchased the same amount of stock. If the price goes up in the case of a call or down in the case of a put, they can exit the contract with a profit similar to if they had bought and then sold or sold and then repurchased.
  • 13. This is the leverage part. For a lot less money the trader can get roughly the same profit. The risk in this case is that the stock will not go up or down in price as anticipated. However, the risk is limited to the cost of the option contract.
  • 14.
  • 15. Risks When Selling Calls or Puts
  • 16. Sellers of options get money up front. This is the sum total of their profit. They retain that profit if the stock in question does not move up or down, contrary to their expectations. The leverage part is that they do not need to pay any money to own the stock to start this trade. They are taking on risk.
  • 17. Thus, the seller of an option contract can gain a nice premium while not investing any money! The risk is that the stock in question not only goes up or down contrary to their expectations. It goes up or down dramatically which can create monumental losses. There have been cases where investment banks have gone out of business due to the actions of a single trader selling ill-advised calls or puts.
  • 19. In the cases of trading on margin and options trading the trader or investor has their fate in their own hands. In the case of leveraged ETFs an investor is trusting someone else. These investments work like margin accounts where profit may be two, three, or more times normal. And losses follow the same multiple. These vehicles are generally designed to create profits within a trading day.
  • 20. This is sort of like investing in a day trader. These investment vehicles do not perform over time the same as the underlying stock or index that they are tracking. These are very risky investments best left to those with the capital to absorb big losses and the time and expertise to track their performance every moment of every day!
  • 21. Don’t Invest If You Don’t Understand
  • 22. We frequently mention that successful long term investors like Warren Buffett never invest in a company unless they fully understand what they do to make money. And they never invest until they are certain that the company’s business plan will continue to generate profits well into the future. Using this sort of conservative investment philosophy it could be possible to increase one’s profits by using leverage.
  • 23. Sadly, far too many novice investors fall prey to greed and use leverage with investing and trading vehicles that they do not understand. They employ this approach to stocks, currency pairs, or commodity futures where they do not have the necessary knowledge or skills. The bottom line of this little lesson is this. Don’t invest if you don’t understand exactly what you are dealing with and what you are doing in any investment and this includes using leverage.
  • 24. For more insights and useful information about investments and investing, visit www.ProfitableInvestingTips.com.