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Alternative Investments

The Pros & Cons Of Using Leverage For Investing

Leverage can increase both your potential profits and loss.

In the financial world, the word leverage refers to the use of borrowed capital to increase the exposure that an investor faces. For shorter-term trade, leverage is sometimes deployed by investors to increase the size of an investor’s exposure. The use of leverage allows investors to increase their potential return on capital if prices move in the right direction for their trade.

If an investor puts in $1,000 in a trade and earns 5% on their original capital, they will make $50. With the use of leverage, the same investor can also use their $1,000 to take an investment exposure of up to $5,000 leverage (5X leverage). If they earn 5% on their trade, they will make $250, or 25% on their original capital.

One such product that is listed on the Singapore Exchange (SGX) that we can use for short-term trades is Daily Leverage Certificates (DLCs). DLCs derive their value from the underlying asset(s) that they are tracking, as opposed to investing in the asset(s) itself. When we buy a DLC, we are exposed to the daily price change of the underlying asset(s) that the DLC is tracking.

An airbag mechanism is built into the DLC to slow the rate of loss in the value of the DLC in extreme market conditions when triggered. Think of it as a circuit breaker. If the losses sustained by the DLC fall below a certain level on any given day, the airbag mechanism will automatically trigger an automatic intraday reset. When triggered, the airbag mechanism may reduce the ability of the product to recoup losses due to its reduced exposure to the underlying asset.

There are plenty of DLCs are that trading on the SGX that we can use to gain short-term investment exposure. These include both indices and companies that are listed in Singapore and Hong Kong. There are also DLCs that track the daily movement of the NASDAQ-100 and the S&P 500.

Interested to trade DLCs? You can find out more about how DLCs work on the SGX website