Leverage

What Does Leverage Mean?

Leverage is the buying or selling of an asset with a portion of the price paid by an investor and the remainder covered by a lender. Under such an agreement, the asset becomes collateral for the loan and the lender receives interest on the amount advanced for the loan’s duration.

In this type of arrangement, the investor is the only party to benefit or suffer the realized gain or loss of owning the asset.

How Do Leveraged Transaction Work?

Leveraging allows an investor to buy more securities than would be possible if only cash were used. This amplifies possible gains as well as losses, at the same rate.

Brokerage accounts call this buying or selling on margin. Brokers of stocks typically allow clients to leverage their accounts by 2:1. In practice, this means that if an investor has $500 cash in a margin account, $1000 worth of securities can be purchased.

If the price of the securities rises to a value of $1100, the investor can sell the securities for a profit of $100 resulting in an account balance of $600, minus the interest paid to the brokerage. If the price of the securities drops to $900, and the investor liquidates the position, a loss of $100 would occur for an account value of $400, minus interest paid to the brokerage.

If the value of the asset falls while the investor maintains ownership, the investor is required to keep enough equity in the account for a maintenance margin. This investor may also be required to add equity to the account if a margin call occurs.

When Is Leverage Used?

Most property buyers use leverage for purchases. Buyers are usually required to pay 20% to 30% of the price of a property while the bank pays the remainder--a 20% down payment and 80% loan is a leverage ratio of 5:1. This amplifies homeowners exposure to the ups and downs of the housing market, often resulting in larger percentage returns and losses on the equity in their home.

Companies also use leverage to acquire other companies. When a company uses a large amount of debt to purchase another company it is called a leveraged buyout (LBO). In this circumstance, the company making the acquisition may only be required to pay 10% of the purchase price with the remaining 90% coming from a lender and/or from the sale of bonds.

The bonds in this type of deal are often not considered investment grade because of the amount of risk involved. The higher risk of default on the bonds is reflected in the unusually high-interest rates that are paid by the purchasing company, which classifies them as junk bonds.

Where You Can Find Leverage Information At Investing.com?

AT the main Brokers Database page - This page provides multiple filters to find brokers by minimum deposit, the minimum fee per trade, margin rate, and other features for all trade markets - stocks, forex, cryptocurrencies, futures, and options. The page provides multiple filters to find brokers by minimum deposit, the minimum fee per trade, margin rate, and other features.

Other leverage tools available on Investing.com include the Margin Calculator, and the Carry Trade Calculator.