How to invest with leverage?

The ability to go into debt to invest more is often presented as an argument in favor of real estate at the expense of the stock market. Indeed, your banker lends you no problem when it comes to buying property to rent out. On the other hand, if you ask him for a loan to buy shares or invest in the stock market, you will definitely be refused.

However, the leverage effect, which thus consists in borrowing to invest in excess of the original rate, is not reserved for real estate; this is also possible with a scholarship. We explain how!

Investments with SRD

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

Usually, when you buy a stock, you need to have the entire amount in cash in order to make a “cash” transaction. With SRD, this is not necessary, since you pay for the purchase if you really decide to get the games. Therefore, if your transaction is successful, you pay nothing, since the selling price is higher than the buying price. You just get capital gains. On the other hand, if your operation is unprofitable, you will have to pay the loss.

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

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

Also note that the SRD follows a monthly rhythm. At the end of the month, called the liquidation day, you will either have to sell your positions, actually buy the securities, or roll over your positions to the next month (which results in high rollover costs) and the default positions will be rolled over. one month to another.

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Use derivatives

A derivative is a financial instrument whose price depends on the price of a given asset, called the underlying. Derivatives are an alternative to SRDs for leveraged investing and have several advantages:

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

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

orders

Warrants are options to buy (call) or put (put), characterized by an expiration date and an exercise price. Take the example of a LVMH stock call warrant with the following characteristics:

  • execution price: €600
  • maturity: 1 year

With this warrant, you will receive at the expiration the difference between the LVMH share price and the strike price.

To complete the example, let’s say LVMH shares are currently worth €620 and the warrant price is €25.

At maturity, several scenarios are possible:

  • LVMH costs 700 euros; you get €100 for your initial bet of €25, i.e. profit of 300% while shares rose only 16.7%
  • LVMH costs 610 euros; you get €10 for a bet of €25, i.e. €15 loss on €10 stake increase
  • LVMH costs 500 euros; you lost your original bet of 25 euros while the shares lost 100 euros

Thus, the maximum loss is limited by the invested premium.

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

Turbines

Turbos are derivative products that, like warrants, allow you to bet on the rise (call) or fall (put) of stocks, indices or commodities.

Turbines also have three main characteristics:

  • strike price (which is used to calculate the price of the product)
  • barrier deactivation (stop loss deactivation)
  • deadline (some of them are even infinite)

As with warrants, a turbo call allows you to pocket the difference between the stock price at expiration and the barrier. But this time, if the stock price falls below the barrier, the turbo is turned off and you lose your original bet. So it can be dangerous to bet on a turbo whose barrier is close to the stock price. However, the closer the barrier is to the share price, the greater the leverage effect; it’s up to you to see your priorities!

You can invest in warrants and turbos from your Bourse Direct securities account.

WARRANTY LIST TURBO LIST

Article written by Hugo Bompard, Founding President of Finance Héros, a website that helps you take back control of your personal finances!