How to invest with leverage?

The opportunity to get into debt to invest more is often presented as an argument in favor of real estate to the detriment of the stock market. In fact, your banker gives you a loan without much trouble when it comes to buying real estate to rent. On the other hand, if you ask him for a loan to buy shares or invest in the stock market, you will certainly be denied.

However, the leverage effect, which thus consists in attracting loans for investment above the initial rate, is not reserved for real estate; this is also possible with a scholarship. We explain how!

Investing with SRD

SRD (Deferred Settlement Service) is a system that allows you to buy shares and calculate them later, which has a number of advantages.

Usually, when you buy stocks, you need to have the entire amount in cash to complete the transaction “in cash”. With SRD this is not mandatory as you pay for the purchase if you decide to really get the titles. Therefore, if your transaction is successful, you do not pay anything, because the sale price is higher than the purchase price. You are just collecting capital gains. On the other hand, if your transaction is losing, you will have to pay damages.

Thus, this system allows you to invest without having to pay the full amount needed to buy your shares, thanks to leverage from 1 to 5.

Specifically, with Leverage 5, if you have € 5,000 in cash in your securities account, you can buy up to € 25,000 of stock. And if you don’t have liquidity, but have a portfolio of 5,000 euros of European stocks bought in cash, you can buy 12,500 euros of additional shares (leverage is halved, stocks are likely to fall)!

Also note that SRD follows a lunar rhythm. At the end of the month, which is called liquidation day, you will have to either sell your positions, or actually buy securities, or move your positions to the next month (which creates high transfer costs), with the default positions being moved for one month to another.

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Use derived products

A derivative is a financial instrument whose price depends on the price of the asset, which is called the underlying. Derivative financial instruments are an alternative to SRD for leverage investing and have some advantages:

  • leverage can be much higher than on SRD (for example, from 1 to 15);
  • there are also no time limits for some products;
  • and the investment universe is wider, so you can find derivatives on stocks, indices, commodities, and so on.

There are a large number of derivative products, including warrants, turbines, future or even CFD. Let’s focus on two derivative products that are especially popular with retail investors: warrants and turbo.

Warrants

Warrants are options for buying (calling) or selling (put), which are characterized by the expiration date and the exercise price. Take, for example, a call order for an LVMH share with the following characteristics:

  • execution price: 600 euros
  • maturity: 1 year

With this warrant you will receive after redemption the difference between the share price of LVMH and the exercise price.

To complete the example, assume that the LVMH share is currently € 620 and the warrant price is € 25.

In adulthood, several scenarios are possible:

  • LVMH costs 700 euros; you get 100 euros for an initial bet of 25 euros, ie a win of 300%, while the stock rose by only 16.7%
  • LVMH costs 610 euros; you get 10 euros at a rate of 25 euros, ie a loss of 15 euros, and the share increased by 10 euros
  • LVMH costs 500 euros; you lost your initial bet of 25 euros and the stock lost 100 euros

Therefore, the maximum loss is limited to the invested premium.

However, you have the option to resell the call order at any time until maturity during trading sessions.

Turbines

Turbo is a derivative product that, like warrants, allows you to bet on the rise (call) or fall (put) of a stock, index or commodity.

Turbines also have three main characteristics:

  • execution price (used to calculate the price of the product)
  • decontamination barrier (deactivation stop loss)
  • deadline (some of them even infinite)

As with warrants, turbo calls allow you to pick up the difference between the stock price at the end of the validity period and the barrier. But this time, if the stock price falls below the barrier, the turbo shuts off and you lose your initial bid. Therefore, betting on a turbo, the barrier of which is close to the stock price, can be dangerous. However, the closer the barrier is to the stock price, the greater the leverage effect; You have to see your priorities!

You can invest in warrants and turbochargers from your Bourse Direct trading account.

LIST OF GUARANTEES LIST OF TURBS

The article was written by Hugo Bompard, the founding president of Finance Héros, a site that helps you regain control of your personal finances!