Wednesday, December 29, 2010

Leverage

Leverage is the use of debt or derivatives to increase the exposure beyond the initial investment amount. For example with margin trading an investor may be able to buy a stock with a 50% margin lending ratio, if the investor has $100 they will be able to afford $200 of stock, similarly using options an investor could significantly increase their exposure. Most funds allow very little or not use of leverage, however some specifically do and market themselves as such. Hedge funds typically will make ample use of leverage, as well as leveraged ETFs which e.g. offer two times or three times the index return. Leverage will generally increase the possible return as well as the possible loss.

Synonyms: Gearing, Debt, Leveraged ETF, Margin trading, Derivatives

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