As a rule, equities can generate annual returns of 7 to 8% . But it gets even better: options can leverage stocks, which can lead to even higher returns. There are a few fundamental aspects to consider, because leveraging stocks not only has benefits, but also involves risks. It is important to understand the principles of stock leverage.
Stock Leverage – what is it?
Many private investors do not know exactly what leverage is in stocks and how it works. On the stock exchange, investors have the opportunity not only to invest directly in a commodity, in a currency or in a share (underlying), but also to secure the purchase of an underlying at a fixed price via so-called derivatives .
The advantage: when buying a derivative, such as an option, investors have to take much less capital into their hands than with a direct investment.
Stock Leverage – an example
Here is a simple example: A company quoted at $15. An investor not only buys 100 shares (15 x 100 = $1,500), but also invests in 100 purchase options ( Call options ), with which the investor acquires the right to acquire 100 shares of the company within one year at the price of $17. ...CONTINUE READING