Stock Market Leverage

[moneybagz]

I was wondering whether anyone uses leverage on the stock market for increasing returns, especially when markets are trading low (maybe following a crash). What are the costs of leveraging and can it ever be deemed a sensible strategy at times, say when stock market PE is less than 10.

[johnhemming]

I haven't done for decades. What you have to watch with this sort of thing is that it gears up and down. This is much like selling options without the underlying cover. It all depends really on how you get the cash. If you increase your mortgage to fund trading then that probably is at a lower interest rate.

[DiamondEcho]

I was wondering whether anyone uses leverage on the stock market for increasing returns, especially when markets are trading low (maybe following a crash). What are the costs of leveraging and can it ever be deemed a sensible strategy at times, say when stock market PE is less than 10.

I used to for years, and I've just recently finished 'paying off the mortgage', ie that margin on the portfolio, which I did as my wife wasn't comfortable with the idea. I didn't see it much different from getting a mortgage on a well planned property purchase made for the very long-term; a long-term arb on the div income, vs a much lower [1/5th?] interest expense. Either way it was useful and had helped me achieve roughly what I set out to achieve. That was 'simple cash margin' vs an LSE based share portfolio. Every dividend I received was applied immediately to reduce the margin (over about 10 years).

Of course you could er... effectively margin, ie leverage, via options etc., it's a question of the depth of your knowledge, I found cash margin into outright share purchases required less ongoing management/strategising.

The %rate I was charged was a stepped rate vs the %leverage I had. At the lower end it was 0.05-0.5% over base, varying daily. IDR what it was up at say 80% margin, maybe 2% over base at the peak...

If you think it's for you and find a way to do it go easy eh? The day I was granted 50% of my NAV as margin I was 'Right-ee-oh, what shall I go and buy!!?'. I find that quite alarming in retrospect. I.e. without self-discipline I could have simply thrown it into foolish choices. The better and more rigorous your broker the more rigorous they'll be in confirming that you are qualified to have a margin account and the less they'll charge you for it. The less rigorous the checks, then as you'd expect they're going to charge you much more.

Lastly, a bad day hurts, but that margined up can be genuinely traumatic, a terror. I only had one memorable margin call, but it meant selling up to free up cash when markets had crapped out. You never want to go there, that's no longer in the realm of investing, it's verging on gambling, and that's no investment strategy.

[Lootman]

This is much like selling options without the underlying cover.

Depends. Selling uncovered options is certainly risky, but your profit is capped at the amount of the premium received. That's your maximum gain. So it's not really a leveraged play on the markets so much as selling insurance. You are collecting coins in front of a steamroller.

The real way to use options to make geared plays on the market is to buy options. That way your gain is unlimited but your maximum loss is defined.

[TraderTed]

My experience is in CFDs (Contracts for Difference)

You have to be careful you can win/lose 30,50 or 100 times more than expected.

Holding overnight costs are based on the underlying interbank rate plus the broker's percentage.

You can trade long (buy) and short (sell).

UK regulator is cracking down on private investors using these products right now so probably lower leverage / loss limits / enforced stops.

Problem with stops is there seems to be a lot of stop hunting in after hours markets.

So leverage products re best used for day trading really and for shorting.

Another capital gains tax free alternative is spread bets. But bare in mind a contract holds more weight in a court if your broker refuses to honor your winning position (Bets are a gentleman's agreement in UK law). I have seen it happen. They claim "force majeure" (unforeseeable circumstances that prevent someone from fulfilling a contract) for things like a company going bust or a Flash Crash.