Leverage! Somebody give me advice!
Discussion
A newbie trying to understand and possibly invest some of my personal wealth in the markets.
What is leverage? How is it dangerous to me and my investment? Any practical examples to help me understand?
I don't want to invest £500 in a company, for it to go pear shaped and lose my home, car and everything I own over it.
I always thought that if you invested (say) £500 and the share price fell to £0.00, you lost the cash and moved on.
Help!
What is leverage? How is it dangerous to me and my investment? Any practical examples to help me understand?
I don't want to invest £500 in a company, for it to go pear shaped and lose my home, car and everything I own over it.
I always thought that if you invested (say) £500 and the share price fell to £0.00, you lost the cash and moved on.
Help!
Progressive said:
I'm slow so excuse me.
If I invest:
£500 in RBS
£500 in DES
£500 in RRR
£500 in GSK
All go completely wrong, what's my worst outcome?
RBS is currently 39p. For the sake of simple maths, let us say it is 40p and you want to risk £400. Now, the question is, for the purpose of leverage, how much do you want to risk per penny? If you are simply buying £400 of shares, then if RBS goes to the wall, you will lose £400 as that is £10/penny of share value (or point) (so £10/pt). No leverage there. So if it goes to 80p then you make £400 profit. If it goes to 0p, you lose £400.If I invest:
£500 in RBS
£500 in DES
£500 in RRR
£500 in GSK
All go completely wrong, what's my worst outcome?
However, with CFDs or spreadbetting, you could put a stop at 30p, then risk £40 per pt. So if it falls to 30p, you lose £400 and the trade is closed. If it goes to 80p, you make £1600.

The problem comes if RBS is nationalised or there's terrible news over the weekend which spikes the price down to say 15p on Monday open. Most spreadbetting companies will say you lost (40pts - 15pts) = 25pts = 25 x £40 = £1000.
And if you really leveraged it up, so the stop was at just 38p, £200/pt, if it goes to 80p you could make £8000 but lose £5000 on a spike down.
This is just the tip of the trading iceberg, of course. If you really want to be raped without lube, follow this awesome example.
So it's 40p. You go in with a £400 account. You stick the stop at 38p because it can only go up, your friend tipped you. So you have £200/pt. It falls to 38.2p... dangerously close to your stop. You aren't having any of this and are not gonna take a loss as your first trade, so you deposit further £1600, move the stop back to 30p.
It continues to fall, 32p. You mutter, "It'll turn round, it's a bank, banks don't go bust. This is a great price to buy." You put another £2k in and buy some more at 32p, stop at 30p. It won't fall past 30p, roight? So now you're £1000/pt and £200/pt. You only need it to rise 2p to see break even now. Cunning bit of averaging down. We'll beat the market.
It drops to 30.5p. You're feeling a little sweaty now. You CANNOT take a £4k loss. That's your holiday budget. Your wife will KILL YOU. Let's put another £4k in and save the day. Your wife will think you are amazing when you buy her that Rolex Datejust after you've made a genius £64k because your friend said it was gonna move to 80p. So you move the stop to 20p.
Bad news over the weekend! RBS admits it had its finger in more CDO pies than originally thought! Price on Monday open is 10p. Your position is automatically closed. You are now down £40k and the spreadbetting company keeps calling you to pay up.
Edited by RemainAllHoof on Saturday 2nd July 20:11
Darren,
I nearly fell down there this past week
Fortunately things turned around during the latter part of the week.
I like your profile page including - another exhaust sound aficionado. You'll like what I'm planning on my TVR.
You'll also like: http://www.youtube.com/watch?v=go6kxyKSDZ0
Phil
I nearly fell down there this past week

Fortunately things turned around during the latter part of the week.

I like your profile page including - another exhaust sound aficionado. You'll like what I'm planning on my TVR.
You'll also like: http://www.youtube.com/watch?v=go6kxyKSDZ0
Phil
Edited by Transmitter Man on Sunday 3rd July 16:18
Transmitter Man said:
Darren,
I nearly fell down there this past week
Fortunately things turned around during the latter part of the week.
I like your profile page including - another exhaust sound aficionado. You'll like what I'm planning on my TVR.
You'll also like: http://www.youtube.com/watch?v=go6kxyKSDZ0
Phil
Be careful. Like playing with crocodiles, you'll only get lucky so many times and then the big one will rip your head off. I have seen it happen too many times to acquaintances. You're better off to consider exiting for a reasonably small loss once in a while than taking the MOAL (Mother Of All Losses).I nearly fell down there this past week

Fortunately things turned around during the latter part of the week.

I like your profile page including - another exhaust sound aficionado. You'll like what I'm planning on my TVR.
You'll also like: http://www.youtube.com/watch?v=go6kxyKSDZ0
Phil
That video is crazy. Think my neighbours will object.

As posted over on other forum, the biggest problem is ones own greed. lets face it, if you put 1K on RIO or BLT at 5% margin, that gives you 20K position. It moves up 5% and you close out. On cash invested this is a 100% return pre costs etc, but in reality greed can kick in. Leverage is great but greed and leverage maybe not. This CFD thing is not a get rich quick scheme, its very hard work, not least the pressure to keep trading when the market is going against you
Progressive said:
I'm slow so excuse me.
If I invest:
£500 in RBS
£500 in DES
£500 in RRR
£500 in GSK
All go completely wrong, what's my worst outcome?
In a straight shares investment you can only lose the money invested, ie in your example 2k. This is not a leveraged investment.If I invest:
£500 in RBS
£500 in DES
£500 in RRR
£500 in GSK
All go completely wrong, what's my worst outcome?
A simple to understand leveraged investment would be a property. Say you buy a property for 100k with a 10k deposit. If property prices rise by 10% then your investment has risen 100%. By the same token if property prices went down 10% you will have lost all of your money, if they keep going down then you are now losing money you don't have. This is a leveraged investment.
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