Buying on Margin: Leverage

I Leverage refers to the practice of using borrowed funds to trade in financial and other markets.

I Investors leverage their exposure to financial investments by borrowing from their broker.

I Investors increase their leverage when they buy securities on margin.

I Buying on margin can achieve greater upside potential...

I ... but exposes investors to greater downside risk!

I Margin loans are also subject to margin interest fees. The interest on the borrowed funds — margin interest — is typically a little higher than the prime rate that banks charge to their best customers.

Buying on Margin: Leverage

I Leverage refers to the practice of using borrowed funds to trade in financial and other markets.

I Investors leverage their exposure to financial investments by borrowing from their broker.

I Investors increase their leverage when they buy securities on margin.

I Buying on margin can achieve greater upside potential...

I ... but exposes investors to greater downside risk!

I Margin loans are also subject to margin interest fees. The interest on the borrowed funds — margin interest — is typically a little higher than the prime rate that banks charge to their best customers.

Buying on Margin: Leverage

I Leverage refers to the practice of using borrowed funds to trade in financial and other markets.

I Investors leverage their exposure to financial investments by borrowing from their broker.

I Investors increase their leverage when they buy securities on margin.

I Buying on margin can achieve greater upside potential...

I ... but exposes investors to greater downside risk!

I Margin loans are also subject to margin interest fees. The interest on the borrowed funds — margin interest — is typically a little higher than the prime rate that banks charge to their best customers.

Buying on Margin: Leverage

I Leverage refers to the practice of using borrowed funds to trade in financial and other markets.

I Investors leverage their exposure to financial investments by borrowing from their broker.

I Investors increase their leverage when they buy securities on margin.

I Buying on margin can achieve greater upside potential...

I ... but exposes investors to greater downside risk!

I Margin loans are also subject to margin interest fees. The interest on the borrowed funds — margin interest — is typically a little higher than the prime rate that banks charge to their best customers.

Buying on Margin: Leverage

I Leverage refers to the practice of using borrowed funds to trade in financial and other markets.

I Investors leverage their exposure to financial investments by borrowing from their broker.

I Investors increase their leverage when they buy securities on margin.

I Buying on margin can achieve greater upside potential...

I ... but exposes investors to greater downside risk!

I Margin loans are also subject to margin interest fees. The interest on the borrowed funds — margin interest — is typically a little higher than the prime rate that banks charge to their best customers.

Buying on Margin: Leverage

I Leverage refers to the practice of using borrowed funds to trade in financial and other markets.

I Investors leverage their exposure to financial investments by borrowing from their broker.

I Investors increase their leverage when they buy securities on margin.

I Buying on margin can achieve greater upside potential...

I ... but exposes investors to greater downside risk!

I Margin loans are also subject to margin interest fees. The interest on the borrowed funds — margin interest — is typically a little higher than the prime rate that banks charge to their best customers.

Buying on Margin: Leverage

I Suppose IBM stock is selling for $100 per share. A bullish investor with$10, 000 to invest expects the price of IBM to go up by30%during the next year.

I Ignoring dividends, the expected rate of return would be30%if the investor invested$10, 000to buy100shares.

I Assume the investor borrows another$10, 000from the broker and invests it in IBM too, for a total of$20, 000for200shares.

I Assume an interest rate on the margin loan of9%per year.

I Ignoring dividends, what is the investor’s rate of return if IBM stock goes up30%by the end of the year?

Buying on Margin: Leverage

I Suppose IBM stock is selling for $100 per share. A bullish investor with$10, 000 to invest expects the price of IBM to go up by30%during the next year.

I Ignoring dividends, the expected rate of return would be30%if the investor invested$10, 000to buy100shares.

I Assume the investor borrows another$10, 000from the broker and invests it in IBM too, for a total of$20, 000for200shares.

I Assume an interest rate on the margin loan of9%per year.

I Ignoring dividends, what is the investor’s rate of return if IBM stock goes up30%by the end of the year?

Buying on Margin: Leverage

I Suppose IBM stock is selling for $100 per share. A bullish investor with$10, 000 to invest expects the price of IBM to go up by30%during the next year.

I Ignoring dividends, the expected rate of return would be30%if the investor invested$10, 000to buy100shares.

I Assume the investor borrows another$10, 000from the broker and invests it in IBM too, for a total of$20, 000for200shares.

I Assume an interest rate on the margin loan of9%per year.

I Ignoring dividends, what is the investor’s rate of return if IBM stock goes up30%by the end of the year?

Buying on Margin: Leverage

I Suppose IBM stock is selling for $100 per share. A bullish investor with$10, 000 to invest expects the price of IBM to go up by30%during the next year.

I Ignoring dividends, the expected rate of return would be30%if the investor invested$10, 000to buy100shares.

I Assume the investor borrows another$10, 000from the broker and invests it in IBM too, for a total of$20, 000for200shares.

I Assume an interest rate on the margin loan of9%per year.

I Ignoring dividends, what is the investor’s rate of return if IBM stock goes up30%by the end of the year?

Buying on Margin: Leverage

I Suppose IBM stock is selling for $100 per share. A bullish investor with$10, 000 to invest expects the price of IBM to go up by30%during the next year.

I Ignoring dividends, the expected rate of return would be30%if the investor invested$10, 000to buy100shares.

I Assume the investor borrows another$10, 000from the broker and invests it in IBM too, for a total of$20, 000for200shares.

I Assume an interest rate on the margin loan of9%per year.

I Ignoring dividends, what is the investor’s rate of return if IBM stock goes up30%by the end of the year?