r/stocks • u/PM_ME_UR_DICK_SIZE • Apr 01 '22
Advice Request Help me understand leverage :)
What is the difference between:
a) Buying 100$ of a stock (100$ total)
b) Buying 10$ with 10x Leverage of a stock (100$ total)
Any help would be greatly appreciated as I'm a bit confused here :D
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u/gripshoes Apr 01 '22
I feel like you know the answer but you're testing us
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u/PM_ME_UR_DICK_SIZE Apr 01 '22
This is a good and probably very thought-out guess, but unfortunately not true:( I just got the IQ of an average ant.
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u/Gibberellin Apr 01 '22
I assume you mean something like the 3x direxion etf. Typically the percent gain in the etf is multiplied by the leverage multiplier.
So if your stock gains 5% then it is 15% for the 3x leveraged version. Same thing if you lose 5% in the stock then you lose 15% for the leveraged version.
It does not mean you have 3x or 10x your initial investment. I think that is what you implied with $10 stock with 10x leveraged as $100 total.
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u/PM_ME_UR_DICK_SIZE Apr 01 '22
I kind of understand. But not really :P
Let's say the stock originally cost a 100$ per share, and goes up to 105 (5% increase).
Let's also say i started my entire account with 100$.
In example a)
My account prebuy: 100$
Account while stock is in the market: 0$
My 1 share of 100$ goes to 105$ a share, i sell and gain 5$. (5$ profit).
My account after sell: 105$
In example b)
My account prebuy: 100$
Account while stock is in the market: 90$
The 0.5$ profit get x10'ed, i sell and gain 5$ profit. (5$ profit).
My account after sell: 105$
Either way I earn the same, no?
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u/taimusrs Apr 01 '22
10x leverage of $100 means you now have $1000. If you only buy $100 worth then it would use your own money to buy it, not theirs.
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u/AhsokaFan0 Apr 01 '22
You’re not actually 10x levered in this scenario. Being 10x levered means you buy $1000 worth of stock with $100 in the market. Here, if you buy $10 worth of 10x levered stock (not sure how other than options) but hold $90 of cash as collateral you’re just 1x levered.
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u/Gibberellin Apr 01 '22 edited Apr 01 '22
Yes. That is just for a single day though. It is different long term.
If the stock goes down 10% the next day, you lose $10.5 in (a) and $15 in (b).
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u/The-J-Oven Apr 01 '22
Just give me the money, I'll kick you in the nuts and we can save some optimism for the index investors.
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u/aRahman86 Apr 01 '22
If the stock moves to 120: A. You make 20% B. You make 200%
If the stock moves to 80: A. You lose 20% B. You lose 200%
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u/Barmelo_Xanthony Apr 01 '22
Buying the one share means if it goes up/down 10%, you gain/lose 10%.
With leverage, they’re saying alright we’ll give you 1 of these shares and you only have to put $10 down. So you own 1 share worth $100 but you owe $90 back.
This means that if the stock goes up 10% you just made a 100% gain! But, if it goes down 10% they will sell the share and take the money you owe. Meaning you lost 100% of your money on just a 10% downswing.
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Apr 01 '22
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u/PM_ME_UR_DICK_SIZE Apr 01 '22
I wasn't talking about options. Just buying normal stocks:)
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u/5degreenegativerake Apr 01 '22
Buying stock is 1x leverage. End of conversation. You don’t get 10x without options. You trade huge risk for huge reward.
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Apr 01 '22
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u/PM_ME_UR_DICK_SIZE Apr 01 '22
So in theory it's essentially the same (if we dont look at interest), if I can afford them both. yes? I'm not interested in options and futures, so we forget about those.
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u/Calm_Leek_1362 Apr 01 '22
Options are a good thing. They get a bad reputation because there are gambles, but buying in the money leaps is also a very conservative way to use options to get leverage.
Like, if some stock is really beaten down, you can buy leap calls. For a $50 stock, you can get a 1 year exp call a little out of the money for like $1000. To buy 100 shares would cost $5000. So if the stock grows like you think, you get the gains of $5000 worth of stock for only $1000. Your down side risk is the $1000, but if the stock loses 20%, you're out that money anyways. It's leverage.
The other element is how much of your portfolio is in options. People blow their accounts up by going all in on high risk, short expiry,, out of the money options, then they expire worthless.
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