just wondering what peoples views were in regard to using leverage.
My thought line is that I could use 25% additional leverage therefore even if the market/portfolio dropped 50% I would still have surplus funds to cover Margin ( On average my margin requirements are 12%)
Anyone else have any thoughts on this.
Investor, Trader and Financial Educator As a long term investor/trader I have consumed hundreds of financial books and endured countless hours of self education. Hopefully my contribution through my channel will reduce the learning curve duration of many aspiring traders by providing the key information in a concise and enjoyable manner. https://www.youtube.com/channe... more »
You need to consider what happens when the market and your portfolio goes down. Losses are magnified. If you are a newbie / are inexperienced which I assume you are - don't do it.
At risk of being simplistic, I would suggest that the use of material leverage takes you from the world of investing into the world of gambling.
If you buy a stock with your own cash for better or worse you can hold it indefinitely on your own terms. Once you've borrowed funds to leverage your stake, the lender effectively controls your exit in a downturn. Typically, when it looks like the lender might be at risk to lose money you'll either have to post more margin (if you can) or sell your stock. If you win, you might win big. If you lose, you might lose everything invested and lose it quickly.
Leverage works as a means of gearing up returns if you either have a very low risk/high level of confidence - not usually what you get with equities - or where you are using low level stakes that you are prepared to lose completely in the hope that a long odds punt comes in, hence the analogy with placing a bet.
I know plenty of folk that like to use leverage with their "mad money" for the sport as much as the promise of reliable returns, but at the same time keep their long term investment portfolio completely separate. It takes quite a bit of discipline to do this effectively.
Gus.
Thanks Gus,
I'm guessing so long as I have the leveraged % (in my case 25%) sat in my bank account and available to put into the trading account if a call comes I should be ok, otherwise leave it alone....
Cheers
