Leverage is used by traders to magnify the impact of share price movements.
Leverage can be obtained in several ways. Here are some examples:-
This facility is available for most Irish & UK shares. The trader buys the shares today but the settlement date for the purchase (i.e. the date the money is due to the seller) is 20 working days later.
The trader will then attempt to sell the shares at a higher price within the 20 day period until settlement. If the trader succeeds in doing this, then the trader will receive the net profit on the purchase and sale from the stockbroking firm, without ever having to pay for the purchase.
The stockbroking firm will require collateral in the form of cash and/or shares for this type of trading, to cover any losses that may be incurred.
There is usually a premium of up to 0.25% added to the price of the shares for a T+20 purchase.
CFD stands for Contract For Differences.
The stockbroking firm uses a CFD provider or the client can go directly to a CFD provider.
The CFD provider lends the money to buy the shares and charges interest on this loan.
The CFD provider will require collateral in the form of cash and/or shares to cover any losses that may be incurred.
The client can also ‘short’ shares using CFDs. That means that the client can speculate on a fall in the share price by selling the shares, and buying them back at a later date. The CFD provider lends the shares to the client so that this ‘short sale’ can take place.
Options give the holder the right to buy or sell shares at a specific price within a specific time frame.
A ‘call’ option gives the holder the right to buy shares at a specific price.
A ‘put’ option gives the holder the right to sell shares at a specific price.
The trader pays an amount known as the ‘premium’ for the option.
A buyer of a call (put) option will make a profit if the share price rises (falls) by more than the cost of the option premium, before the option expires.
Also known as ‘spread trading’. The trader opens an account with a spread betting firm and bets on a stock rising or falling.
The trader bets a specific amount for each 1 cent (or 1 penny) movement in the share price.
The spread betting will will require collateral in the form of cash and/or shares to cover any losses that are incurred.
Leveraged Exchange Traded Fund
An Exchange Traded Fund (ETF) is a share that tracks the movement of a stock market index or a specific stock market sector.
A Leveraged ETF (also called a ‘turbo’) applies a multiplier to the performance of the market index or sector.
For example, an S & P 500 index long x 4 Leveraged ETF is designed to rise or fall by 4 times the rise or fall of the actual index.
A futures contract replicates the gains or losses of a stock market index.
Futures contracts are leveraged as the trader only deposits collateral known as ‘margin’ with the futures broker to cover losses that may be incurred.
This margin can be as low as 5% of the total value of the contracts traded, thereby multiplying the gains or losses incurred by the trader.
Generally available only through US brokerages, margin trading typically allows a client to buy (or short sell) stock with a value of up to 50% of the current value of their account.