Course 207: Leverage
Leverage in Stock Investing
In this course
1 Introduction
2 Leverage in Stock Investing
3 What Financial Leverage Is
4 How Much Leverage Is Too Much?

Buying stocks on margin is one form of leverage. When buying on margin, an investor puts up a certain percentage of the purchase price (at least half, according to current regulations) and borrows the rest from a broker. Suppose you put up a $50 margin to buy $100 worth of stock; that means you're leveraged 2-to-1, or you control two dollars worth of stock for every dollar invested. If the stock price goes up to $110, you can sell your shares and use $50 to pay back the broker, and you're left with $60, including $10 in profit. Even though the stock only went up 10%, leverage got you a 20% return on your original $50 investment (the $10 profit divided by the $50 investment). The downside is that leverage magnifies the potential losses just as much as the potential gains. If the stock had gone down 10%, you still would have had to pay back $50 to the broker, but your original investment of $50 would be reduced to $40, a loss of 20%.

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