Leverage

[LiboNZT]

Lately I've been trying to calculate the returns of some stocks and I noticed the term leverage. Although I am familiar with the term, I still can't understand the mechanics of leverage. Let's suppose that my starting capital is 1000$, the price of the stock is 50$ and the leverage ratio is 1/10. How can leverage multiply my gains/losses? How does leverage work?

If I buy 10 stocks at the current level and I sell them when the price hits 52$ how exactly can I calculate the gains I have after leverage?

 

[Lord Flasheart]

Lately I've been trying to calculate the returns of some stocks and I noticed the term leverage. Although I am familiar with the term, I still can't understand the mechanics of leverage. Let's suppose that my starting capital is 1000$, the price of the stock is 50$ and the leverage ratio is 1/10. How can leverage multiply my gains/losses? How does leverage work?

If I buy 10 stocks at the current level and I sell them when the price hits 52$ how exactly can I calculate the gains I have after leverage?

There are a few ways of working out leverage,i find keeping it simple best.If you have 1/10 then its generally 10x the amount in your account you can trade.Some companies use a margin for stocks and state it as a %. If they ask for a 20% margin which is common then if you put $1000 in your account you can buy $5000 worth of stock. You would then be liable for any profits or loses on the $5000 worth of shares. If the price fell 20% you would have lost all your investment as 20% of 5000 is 1000. Before it reaches that level they would have given you a margin call asking for more money or would automatically close the position.

In answer to your question you would not have needed a margin as 10 x 50 is 500 which you have in your account.you would have made 10 x $2 profit. At 10/1 leverage you could have purchased $10,000 of stock giving you 20 times the profit($400). of course if the price had gone down $2 you would have lost the same amount which would have been 40% of your account. Hope that helps.

 

[NVP]

think of leverage like borrowing money............higher and higher leverage allows you to buy more and more of the Stock or forex pairing with the same amount of deposit money

it is a great way to make more money ........but only if you are right !

so dont over leverage yourself .....

N