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. ... 

Depending on the type, investors rely on different stock strategies. The most popular are Value & Growth. These are substance and growth stocks , so on the one hand, for example, Coca-Cola or Walmart and on the other hand about coveted FANG shares, ie Facebook , Amazon , Netflix and Google.

Value & Growth: often flowing transitions

The latter, in particular, have quickly become stock market giants and make stock names seem almost boring. Star investors Warren Buffet , the most famous representative of the Value Strategy , shows that they are able to generate a considerable return .

No wonder people like to look at value and growth stocks. An almost classic dispute, in which, however, already the rough comparison “Value & Growth “does not always work so easily, for example when growth stocks mature into companies with real substance.

This is shown for example by Microsoft. The stock is among those that can be accommodated in both camps. It is listed both in the MSCI World Value and in the Growth Index. These indices are the basis for ETFs that can be used on both strategies. With their wide dispersion, they reduce the risk, and with the mapping of the special indices, they simplify matters considerably. ... 

If the stock markets perform surprisingly well even in times of crisis, this is not least due to the injection of funds by the central banks.

But in artificially busy markets a handful of bad news is enough and already the values ​​plummet.

And finally, every crash is a nightmare for the investor.

Secure Deposit: There are funds against falling prices

However, sleepless nights can be avoided with the right tools.

There are a number of ways to secure the deposit and also to take advantage of falling prices.

With some products, one can make a virtue out of necessity and enjoy profits when others lose.

But since every commitment involves both costs and risks, every investor should first consider whether this fits in with his or her investment and investment goals.

If you rely on different asset classes over the long term and with a broad base, you can save yourself the trouble and simply let time work for you. Over longer horizons, short-term losses are barely noticeable.

The situation is different when an investor mainly calculates with stocks and shorter time periods. In this case, there are a few possibilities of depot security: ... 

Risk diversification can provide you with that security and protect your entire portfolio against losses. Therefore, as an investor, you should know how to most skillfully build your portfolio and make the risk so calculable.

The fact is: you can never completely avoid the risk

Risk diversification is certainly not one of the most exciting topics of the investment. Nonetheless, most investment professionals agree,  that diversification is the best way to achieve long-term financial goals while minimizing risk – even when there is no guarantee against losses, of course.

However, you can never completely avoid the risk , even if your portfolio is very versatile. So what do you need for a well-stocked, balanced portfolio? There are three main things to look out for to optimally spread your wealth:

• Your portfolio should include a wealth of different financial instruments – such as cash, stocks, mutual funds and, if possible, real estate.
• Your investments should be exposed to different levels of risk. You do not necessarily have to limit yourself to first-class stocks. The opposite is true: if you invest in different investment products with different returns, it is more likely that the total return will compensate for individual losses. However, this does not mean that you should fall for particularly risky investments (such as penny stocks ).
• Invest in companies as diverse as possible. Thus, the unsystematic risk that you incur with several small companies in the same industry is as small as possible.

Another important question is how many shares should one buy to minimize the risk to his portfolio. The so-called portfolio theory says that with 10 to 12 different possible stocks is already very close to the optimal risk diversification.

That does not mean that your assets are well invested in 12 different stocks of the IT industry. Instead, you should pay particular attention to the size and industry of companies. ... 

Many private investors are currently facing a puzzle. The safe harbor or checking account only casts off minimal interest. Experts therefore advise the money to invest in the stock market. But how can investors there simultaneously increase their money safely and with low risk?

Current situation for investors

With key interest rates just above the 0% mark, savings accounts with banks are no longer worthwhile, because there are also only just over 0% interest rates per year. In addition, the savers in Cyprus and Spain have already been asked to pay and subsequently expropriated by the state.

The logical consequence: if possible, only very small amounts should be parked on the bank so as not to end up even losing money. In addition, an annual loss in value through inflation can in no way be offset by interest on the savings account, or overnight money. Already now, savers pay extra – even if they do not get it as directly held as in expropriation.

Investing in the stock market

It is still advisable to invest a portion of your own capital in equities. It is important to rely on high-yield companies. Naturally, investors can do a lot wrong with the thousands of public companies. Therefore, even here, the risks can be limited when investors buy shares of companies whose value hardly fluctuates. ...