Sale at a loss, or leverage: what is the more risky?

Discussion in 'Stock Market Education' started by WaveWage, Sep 8, 2015.

  1. WaveWage

    WaveWage Well-Known Member

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    Leverage and sell at a loss is often associated, and to be honest, I understand. It is always about betting money you may not have yet or in the future. You bet money, for sure, but then you may need even more money than what you bet earlier.


    For the recall and since I'm in education, leverage is about buying more stocks than your budget allows you to. Basically, if you have a leverage of 10:1, if you have an account of $1,000, you may buy $10,000 of stocks. But, once again, the loss should be paid "in cash", not in leverage, if it goes wrong.


    Sell at a loss is another kind of thing. You sell 10 times a stock at $150 for example, because you expect it to goes down. Because you sell it, you get virtually $1,500 on your account. Then, at any moment, before getting really the money, you must buy it back. If you buy it while it gone down to $100, you buy the 10 stocks at $1,000 and you get the $500. But if the stock is going up to $300, you buy the 10 stocks for $3,000 and so, and you lose $1,500. The problem of sell at a loss, is that a stock has a strong limit of going down. A stock never goes below $0. But it may goes up in a unlimited way.


    So, what's the most risky in your opinion and what of these things you used?
     
  2. JR Ewing

    JR Ewing Super Moderator Staff Member

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    I'd limit the amount of leverage used, and use whatever you have above 100% sparingly, and mainly use that to hedge - shorts, put options, etc.

    Being leveraged at 10, 30, 50+ times equity is what destroyed Lehman and Bear Stearns when things got bad. Had they not been so heavily leveraged, their bad investments would not have brought them down completely. Heavy leverage is great when you're right, but very bad when you're wrong very much.

    Generally, I'll buy more of a good investment if it gets cheaper. But if it's just a quick trade with a limited amount of $ on a company that isn't fundamentally strong, I'll get out if it goes against me by much.
     

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