What Is Leverage Capital?

Leverage, adding borrowed currency to existing funds for investment; leverage ratio, ratio of assets to bank capital; leverage effects in financial management, mainly manifested as: due to specific expenses (such as fixed costs or fixed financial expenses) ), When one financial variable changes by a small amount, another related financial variable changes by a large amount. The rational use of the principle of leverage will help enterprises reasonably avoid risks and improve the efficiency of capital operations. There are three forms of leverage effects in financial management, namely operating leverage, financial leverage, and compound leverage.

lever

(Economic term)

Leverage ratio

The attraction of certification stocks is that they can be big and small. Investors only need to invest a small amount of capital to have the opportunity to obtain a return that is similar to or even higher than the investment in stocks. But pick

Refers to profits made in the production and operation of an enterprise due to the existence of fixed costs

Financial leverage

Financial leverage is simply a multiplication sign. Using this tool, you can magnify the results of your investment, regardless of whether the final result is a gain or a loss, and it will increase at a fixed rate. Therefore, before using this tool, you must carefully analyze the expected return on investment projects and the risks that may be encountered. In addition, it must be noted that when using the tool of financial leverage, the expenditure of cash flow may increase. Commonly, for example, there is a foreign exchange margin transaction with FXCM Global Gold Exchange. Otherwise, once the capital chain is broken, even if the final result may be huge Investors must also exit early.

Leverage is the ratio of risk to assets on a company's balance sheet. Leverage is an indicator of the company's liability risk, which reflects the company's ability to repay from the side. Generally speaking, the leverage ratio of investment banks is relatively high. Merrill Lynch's leverage ratio was 28 times in 2007, and Morgan Stanley's leverage ratio was 33 times in 2007. ^[1]

Leveraged financial leverage

The leverage effect in finance, that is, the financial leverage effect, is caused by the existence of fixed fees. When a certain financial variable changes by a small amount, another related variable changes by a large amount. That is, the phenomenon that the rate of change in earnings per share of ordinary shares generated by enterprises using debt financing methods (such as bank borrowings, bond issuance, and preferred shares) is greater than the rate of change in earnings before interest and taxes. As the financial expenses such as interest expenses and preferred stock dividends are fixed, when the profit before interest and tax increases, the fixed financial expenses per ordinary share will be relatively reduced, which will bring additional benefits to investors.

The leverage effect in finance includes three forms of operating leverage, financial leverage and compound leverage.

1. Operating leverage refers to the leverage effect of changes in profit before interest and tax that are greater than changes in production and sales volume due to the existence of fixed costs.

2. Financial leverage refers to the leverage effect of changes in the profit per share of ordinary shares greater than changes in earnings before interest and taxes due to the existence of debt.

3. Compound leverage refers to the leverage effect of changes in the profit per share of ordinary shares that are greater than changes in the volume of production and sales due to the existence of fixed production and operating costs and fixed financial costs.

Leveraged futures leverage effect

The leverage effect in futures is the original mechanism of futures trading, that is, the margin system. The "leverage effect" not only magnifies the amount that investors can trade, but also increases the risk investors take many times.

Assume that a trader has a fund of 50,000 yuan for stock or spot transactions, and the trader's risk is only brought by the stock or goods valued at 50,000 yuan. If all the funds of 50,000 yuan are used for stock index futures trading, the risk assumed by the trader is brought by the stock or goods with a value of about 500,000, which will increase the risk by about ten times, of course, the corresponding profit will also be enlarged by ten. Times. It should be said that this is not only the fundamental source of risk for stock index futures trading, but also the charm of stock index futures trading.

Leverage effect

The leverage effect of a warrant is determined by the characteristics of the warrant product.

Assume that the price of the underlying stock in 2013 is 10 yuan, the exercise price of the underlying stock warrant is 12 yuan, and the market price of the warrant (assuming the warrant conversion ratio is 1: 1) is 0.5 yuan. If an investor purchases a warrant, it is equivalent to investing 12 yuan in the underlying stock at a cost of 0.5 yuan. If the future underlying stock rises to 15 yuan, the return rate (excluding transaction costs) is:

Return on investment warrants = (15-12-0.5) /0.5=500%

If the investor directly invests in the underlying stock, the return rate = (15-10) / 10 = 50%

Due to the leverage effect of warrants, if investors make correct judgments on the market outlook of the underlying assets, the return on investment of warrants will often be much higher than the return on investment of the underlying assets. Conversely, warrant investments will lose nothing. Of course, if an investor changes the quantity of the underlying assets originally purchased to the same amount by buying the underlying asset warrants, and the rest is held in cash, the risk is smaller because the investor The biggest loss is not too high a premium.

Leveraged Forex Trading Leverage Effect

The leverage effect of foreign exchange transactions is also quite common in China. Traders only need to pay 1% to 10% of the security deposit, and they can trade 10 to 100 times the amount. What's more, the margin is as low as 0.5%, and transactions of up to 200 times the quota. Because leveraged foreign exchange transactions have very low capital requirements for investors, they can hold positions indefinitely; coupled with flexible trading methods, they have attracted many investors. Due to the time difference between the Asian, European, and American markets, it has become a global foreign exchange market that operates continuously 24 hours a day. No matter where the investor himself is, he can participate in any market and anytime trading. The foreign exchange market is a market without time and space barriers.

Leveraged foreign exchange transactions seem to have small profits and large profits, and in essence belong to a high-risk financial leveraged trading tool. Because participants in margin trading only pay a small percentage of margin, the normal fluctuations in foreign exchange prices are amplified several times or even dozens of times. The returns and losses caused by this high risk are very amazing. On the other hand, the daily turnover of the international foreign exchange market can reach more than 1 trillion US dollars, with many international financial institutions and funds participating. The economic policies of various countries change at any time, and various emergencies occur from time to time, which may cause the large fluctuations in exchange rates. Large organizations employ a large amount of human resources, obtain first-hand information from various channels, and the investment team uses the analysis results to buy and sell profit in real time.

Although the amount of leveraged foreign exchange trading margin is small, the actual funds used are very large, and the daily fluctuation of foreign exchange prices is very large. If investors make mistakes in judging the trend of foreign exchange, it will be easy to wipe out the entire army. Once you encounter unexpected market conditions and fail to take measures in a timely manner, not only will the principal be fully lost, but additional margins may also be added. Investors must not be taken lightly. When deciding on leverage, you must understand the risks involved. ^[2]

Gold leverage effect

The so-called "gold leverage" refers to the customer's judgment of future changes in the international gold price, paying a certain amount of option premium to the bank and buying a margin contract (gold call USD put option or gold call USD call) Options), on the expiry date of the option, the customer has the right to buy or sell paper gold of the prescribed par value from the Bank at the agreed price. With limited investment, the customer can gain unlimited profit space with small and large.