This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Finance Professor: Understanding Leverage

I spent the better part of my career at Merrill Lynch (MER) as a vendor of leverage primarily to hedge funds . You might recall one of them by the name of Long Term Capital Management. LTCM was a master of the use of leverage, which also led to its undoing.

So what is leverage? Leverage comes in many forms. If you've ever bought a house and took out a mortgage, then you've used leverage. In this installment of the Finance Professor, I will shed some light on leverage from the point of view of buying or gaining exposure to stocks or stock indices.

Buying stock with borrowed funds is achieved through the extension of credit from a broker-dealer or other financial institution . Such credit arrangements are regulated by the Federal Reserve through a series of regulations -- Regulation T, Regulation U and Regulation X. Of those rules, Regulation T contains the guidelines that govern the extension of credit by broker-dealers to customers, particularly individual investors who purchase and carry securities. To many people, Regulation T is simply referred to as the "Margin Rules."

The Margin Rules

There are many aspects to the margin rules that you must understand before buying securities on credit. I will discuss those rules in the context of stocks.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $130.28 0.00%
FB $81.53 0.00%
GOOG $565.06 0.00%
TSLA $218.42 0.00%
YHOO $44.52 0.00%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs