subject: It's Intelligent to use Leverage in the Stock Market? [print this page] It's Intelligent to use Leverage in the Stock Market?
For those who do not know, leverage is when you borrow money from the brokerage firm to buy more shares than your original capital will allow. That is, if you can buy 1000 shares of Google, when using a leverage of 1:2, you can purchase 2000 shares in total. If these stocks appreciate only 1%, you will receive your original capital on 2% minus leverage rates (not that much). That is, using this handy tool, you can earn more while using less money.
This benefit attracts many investors to the stock exchange because that way, is it really possible to get rich quickly. The problem is that while you gain much more when everything goes ok, when you're wrong, you lose much more as well. Leverage is a double-edged sword, it can help you a lot but may also have lead you to bankruptcy.
Stock market brokers tend to offer absurdly high levels of leverage, sometimes 500x the original capital of the investor. This much leverage, if used stupidly, may destroy you in a second. The stock market is guilty of this but not as much as the futures market or the foreign exchange market.
All these extra resources would be the dream of any lucky investor because he would become rich in just a few days if he picks the right stock. The problem is that it is extremely unlikely for this to happen and there is a huge risk in the trade. If the investment goes wrong, the investor will lose all of his money in a matter of seconds, literally!
So the leverage should be used only by highly trained investors who really know how to invest in the stock market and not for beginners who do not take the work of studying anything about world markets.
And yes, there are stories of people who have done well investing in this way. It happens from time to time but please do not try to imitate them. The likelihood that it will work is minimal, almost non-existent. Furthermore, the risks are too great. Even if you're good accepting risks, some are simply so huge that it makes no sense to take them. So if you're an advanced investor, be very careful and if you are a beginner, just forget about leverage.
