In our daily life, the principle of leverage is widely used. For example, the steering wheel you use every day uses the principle of leverage. Maybe you didn’t notice that in the financial field, financial leverage is also widely used. The simplest example is a home mortgage loan. Most people buy a house without paying in full. If you buy a $1 million house with a 20% down payment, you are using five times financial leverage. If the house price increases by 10%, your return on investment is 50%. Then if your down payment is 10%, the financial leverage becomes 10 times. Also taking using the $1 million to buy a house as an example: if the house price falls by 10%, the loss of the five times financial leverage is 50%.
In the A-share market, what does stock leverage mean?
It can be said that the stock leverage theory refers to the two methods of margin financing and stock financing. These are both high-risk behaviors to throw out a minnow to catch a whale. If you invest in stocks in this way, you may leave nothing at last. Of course, the high risk will probably bring big return. If you make a profit, you will increase the leverage. For example, if you have one million, you can borrow ten million, and if you buy a stock with so much money, you will earn one million a day, and your capital will double every day.
Leverage in stocks is one type of financial leverage.
Financial leverage, simply put, is a multiplier. Using this tool, it is possible to magnify the outcome of an investment, whether the end result is a gain or a loss. And it will increase by a fixed percentage. Therefore, before using this tool, investors must carefully analyze the expected returns and possible risks in the investment. In the case of good returns, the greater the leverage is, the higher the return will be. In other words, in the case of gloomy market environment, greater leverage means worse loss.
How to activate stock leverage?
In the stock market operation, if you want to buy leveraged stocks, you only need to submit a deposit to the relevant business hall and sign a leverage agreement.
A margin account means that when buying stocks, you only need to spend 25% to 30% of the total value of the stock. For example, if you put $10,000 into a margin account, you can buy stocks with a worth of $40,000. That is four times leverage. Of course, the 75% of the money is borrowed from securities dealers, and the interest rate is generally higher than that of banks and lower than that of credit cards; and your account must also maintain 25%-30% of the market value of the stocks you own. There are many factors that affect the margin. This is because in the process of trading, due to the different nature of various securities, different denominations, supply and demand, customers will change with the changes in these factors when paying margin.