Leverage and Margin

7th Feb '17 by Investor & Trader

5 comments 4773 reads

I use IG and city index for my CFD trading. Depending on who offers the lowest margin requirement for my stocks.

I'm interested to know how other people use leverage but also give insight into my thoughts.

From my research a number of people suggest not using leverage for the reasons of a sharp decline or poor performance could lead you into the red etc.
However, I use a leverage of 140% and consider this to be safe based on the current calculations;

Cash value = 100.000
Leverage = 140%
Leveraged portfolio value = 140,000

Now lets assume a market decline of 50%

New cash value = 30,000
Leveraged portfolio value = 70.000

Now on average my allowable margin for each stock is 20% therefore to continue controlling the new value of 70.000 after a market decline I need 14,000 in my account, however I would have 30.000 which more than covers this.

We know that after a decline such as this the market recovers .

So my question to everyone is why would you not want to use sensible leverage if probably the worst case scenario above you are still able to control your portfolio comfortably without adding further funds.

Thoughts ??

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Investor & Trader

7th Feb '17

I'm also assuming the margin requirement for the individual stock would remain the same during a market correction?

rhomboid1

Margin requirements go up when the market wobbles , which exacerbates problems of liquidity in stocks with a retail following inclined to use SB/CFD

ok thanks, are there any figures out there suggesting how much margin increases?

On my example if margin requirements went from 25% to 50% during the down turn we would need to add an extra 5.000. i.e 50% of the new 70.000 portfolio is 35.000. cash in account is 30,000.

Would be interested to know what kind of increase margin would go up by though?

It's totally unpredictable, it could go up to 100% if the SB company panics, I've had experience of this and margin always gets squeezed at the worst time for you as the customer. I remember in the GFC era being off line on a long haul flight & by the time I landed I had a raft of emails & missed calls and a position closed with no reference to me.

That did me a favour in retrospect

Blissgull

9th Feb '17

I found Capital Spreads to have the tightest spreads when I used spread betting and derivatives.

Personally I will never use them (spread betting companies) again. Nearly everyone loses. Psychologically it is very hard to remain calm and disciplined when using leveraged products.

"We know that after a decline such as this the market recovers ."

Do we? The UK stockmarket has always recovered eventually, but individual shares and sectors have not. While you are waiting for a possible recovery (i.e. not cutting your losers) you have interest to pay on the borrowed money, and you will have plenty of sleepless nights.

Leverage and Margin

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