Year: 2019

Shorting Stock – Explanation

Shorting a stock looks very simple. But, this isn’t a strategy for beginners.

By Guy Avtalyon

Shorting a stock is when a trader borrows stocks and quickly sells them. She or he does that in the hope that can buy them back later at a lower price and return them to the broker or lender. Of course, the trader pockets the difference in the stock price. Shorting is riskier than simply buying stocks. A trader that practice shorting is taking a short position, while investors that are buying and holding stocks have so-called a long position.

In other words, when some trader starts short selling, he or she borrows stocks from an existing stockholder through the brokerage. Than sells borrowed shares at the current market price and takes the cash.

What is shorting stocks?

Generally speaking, when you invest in stocks, you expect to profit from a company’s great times and increasing profits.

But this is a whole different type of traders, called shorts. They do just the contrary. They search the Internet for news about car industry recalls, for example, and look for ways to cash when the stock of such a company is falling.

It’s possible to make money when prices are going down. Of course, if you are willing to accept the risks which are big. One of the strategies to profit on a downward-trending stock is selling short. The hope behind shorting a stock is that its price will decrease or the company will go bankrupt. Of course, it can lead to total ruin for the stock owners.

Shorting a stock means you are profiting if the stock price drops inside the timeframe from your entering the deal and turning back the stock. But if stock price increases, you’ll take a loss. You can short almost every asset, stocks, ETFs, and REITs, but never mutual funds.

What short-seller do?

The short seller is a trader who is buying the stock back but at a much lower price. However, the short seller must promise to return the borrowed stock at some period in the future. Otherwise, the true owner or broker will never borrow the trader a stock.
Borrowed shares have no dividends until the short seller turns them back. Even more, he has to compensate for missing payments to the lender from his own pocket. So, when short-selling it is very important to have accurate information.

When you want to close your short position, you have the obligation to buy the same number of shares at the current price and return them to the lender. Your profit or your loss comes from the difference between the price you sold the stock and the price you bought them for.
The stock for short selling can come from the broker’s inventory, a client of the firm, or from another brokerage company. When the shares are sold, the profits are added to your account.

How to shorting a stock

That involves some important steps. One of them is a short-term strategy.

Selling short is essentially created for a quick profit in stocks that you expect to decrease in value.
The main risk of shorting a stock is a possibility for the price to increase, and as a result, you’ll have a losing trade and losses. The possible stock price valuing is theoretically unlimited. Therefore, you are maybe exposed to great losses in a short position.
Also, shorting stocks involves margin. Hence, a short-seller can be subject to a margin call if the stock price moves up. A margin call requires a short seller to deposit additional money into the account to fill the initial margin balance.
Also, there are some restrictions on who can sell short, which stocks can be shorted, etc. You must be familiar with the regulation if want to short a stock. For example, some limitations are put on stocks wit low price.

Who can short stocks?

First of all, it isn’t for amateurs.

Unlimited losses and a margin account can be exceptionally dangerous for an amateur trader. Especially you don’t completely understand the risk you’ll face whenever you enter a short position without protection.
Due to the possible large losses that short selling generates, brokerages lower this strategy to margin accounts. In case you use a cash account without margin, you’ll not be allowed to short selling.
If you’re not a short seller and don’t like your stocks to be borrowed, the best option is to open a cash account. That will hold away short-sellers to borrow your stocks without your personal permission.
This is usually good practice, anyway.

Is timing important for shorting a stock?

In short, yes. The most important for shorting a stock is to know which one or more could be overvalued, also when it may drop, and when it may rise in value.
Shorting a stock is possible because the stock can be overvalued. For example, the housing bubble in 2008. Firstly, we had an enormous increase in housing costs. So, when the bubble popped we had a correction in the stock market. Remember, stocks can be overvalued or undervalued. In shorting is important to know which one is overvalued.

How long to stay in a short position?

You can enter and exit a short position on the same day. Or you may hold on the position for several days or weeks depending on the strategy and how the stock is performing. Timing is especially important to short selling. But the possible influence of tax practice is important also. So, we have to say, this is a strategy that requires practice and study.

Tools for shorting the stock

Shorting a stock is a strategy that demands to identify winners and losers.
For example, you may choose to go long a carmaker because you expect it’s possible to take market share. But, at the same time, you can go short to another carmaker that might sink.
Shorting is useful to hedge the current long position. For example, you hold stocks of the company and you expect it to decline in the next few months. But you don’t want to sell that stock. So, you could hedge the long position by shorting that stock while expecting it to decrease. When the stock turn to grow again all you need is to close the short position.

But you must be very careful.

Shorting a stock appears as very simple. But, keep in mind, this isn’t a strategy for beginners. Only the advanced traders who recognize the potential problems should think about shorting.

A valuable tool is the “short ratio”, you can see it specified for each individual stock. The short ratio commonly means how many days the stock needs to cover all the short positions. However, there is another benefit to that figure. It reveals the number of shares that are currently shorted by traders in comparison to the number of shares that are available overall.
How to get this number?
Multiply the current short ratio by the 30-day average daily volume of stocks.
Just use it as a quick measure of investors’ sentiment towards a stock. For example, a high short ratio usually shows the belief that stock is falling. There are some exceptions, but understanding those exceptions is the key to victorious short selling.
Stay tuned!

7th February 2019
American option pricing and early exercise

3 min read

American option pricing is the binomial options pricing model that provides a generalizable numerical method for the valuation of options.

American options are contracts that may be exercised early, prior to expiry.

These options are contrasted with European options for which exercise is only permitted at expiry. Most traded stock and futures options are ‘American style’, while most index options are European.

The exercise style of listed options is American by default. Except for options on equity market indexes such as the S&P 500 index.

Options on futures are typically American as well.

The Black-Scholes pricing formulas are not applicable to American option pricing.

Being an algorithm, binomial option pricing models, nevertheless, can be modified to take care of the added complication in the American option.

Let’s see the differences between these two styles: European vs American options

European-style

The seller sells the (call) option to allow the buyer to buy the underlying at the price of K on the expiration date only.

American-style

The seller sells the (call) option to allow the buyer to buy the underlying at the price of K and another option to buy at any time no later than the expiration date.

In these graphs, you can see the main difference.

The key difference between American and European options relates to when the options can be exercised: A European option may be exercised only at the expiration date of the option, i.e. at a single pre-defined point in time. An American option, on the other hand, may be exercised at any time before the expiration date.

American options can be exercised early

Unlike a European option, the holder of an American option can exercise the option before the expiry date. Because of this additional benefit, an American option is always more expensive than a European option.

However, is this benefit of any real use? Is there a situation where the option holder will get a better payoff by exercising the option early?

The answer is NO.

You should never early exercise an American option, especially if it’s a non-dividend paying stock. Let’s look at the reasoning behind this.

The option has intrinsic value and time value. The intrinsic value of the option is always greater than 0.
Along with that, the cash has time value. So, you would rather delay paying the strike price by exercising it. As late as possible.
You could use that money to earn interest.

So, a positive intrinsic value plus time value implies that you are better off selling the option rather than exercising it early. This is true for a non-dividend paying stock.

However, for a dividend paying stock, the only time it may pay to exercise a call option is the day before the stock goes ex-dividend. And only if the dividend minus the cost of carry is less than the corresponding Put.

By exercising, the option holder may forego the time value.

But don’t worry, it will make up from the dividend received.

We use the word ‘may’ because the dividend may not be high enough to justify the early exercise.

Here is the model for American options pricing. Here we take into account a put as an example.

Let
V = V (S, t)

be the option value.

At expiry, we still have
V (S, T)=(X − S) +

The early exercise feature gives the constraint
V (S, t) ≥ X − S

As before, we construct a portfolio of one long American option position and a short position in some quantity ∆, of the underlying.

Π = V − ∆S
With the choice ∆ = ∂V/∂S, the value of this portfolio changes by the amount

The advantage of the American style

The principal advantage of the American style of an option contract is the flexibility it offers to its holder as it can be exercised anytime before the expiration date T. Majority derivative contracts traded in financial markets are of the American style. In mathematical modeling of American options, unlike European style options, there is the possibility of early exercising the contract at some time t* ∈ [0, T) prior to the maturity time T.

It is well-known that pricing an American call option on an underlying stock paying continuous dividend yield q > 0 leads to a free boundary problem. In addition to a function V (t, S), we need to find the early exercise boundary function Sf (t), t ∈ [0, T].

The function Sf (t) has the following properties:

If Sf (t) > S for t ∈ [0, T] then V (t, S) > (S − E)+
If Sf (t) ≤ S for t ∈ [0, T] then V (t, S) = (S − E)+

The free boundary problem for pricing an American call option consists in finding a function V (t, S) and the early exercise boundary function Sf such that V solves the Black-Scholes PDE on a time depending domain:

{(t, S), 0 < S < Sf (t)} and V (t, Sf (t)) = Sf (t) − E, and ∂SV (t, Sf (t)) = 1

In a stylized financial market, the price of a European style option can be computed from a solution to the well-known Black–Scholes linear parabolic equation derived by Black and Scholes.

Recall that a European call option gives its owner the right but not the obligation to purchase an underlying asset at the expiration price E at the expiration time T.

But, let’s make American option pricing simpler

The value and pricing of stocks are fairly simple for most investors to understand. Basically, the value of a stock at any given time should reflect all known information about the company and the market.

However, increased volatility in option value occurs when the expiration date draws close or when it is already “in-the-money.” A call option is “in-the-money” when the present price of the underlying stock is higher than the strike price. A put option is considered to be “in-the-money” when the market price is lower than the strike price. When options are “in-the-money” or close to their expiration date, their value will change at a different rate than the underlying stock. However, the Black Scholes formula is a mathematical equation that can be used to approximate the value of an option relative to its market price.

Delta (Δ) in the Black Scholes formula is equal to the amount that the value of the option is expected to move for every 1 point of movement in the price of the underlying stock. Thus, if delta is 0.5 for stock A, then the value of the option for that stock will increase or decrease by 0.5 for every 1 point of fluctuation in the stock price.

In addition to being affected by proximity to the expiration date and being “in” or “out” of the money, the value of delta may change due to the overall volatility of the underlying stock itself.

There are times, however, when the Black Scholes formula fails to predict the value of the option.

The bottom line

The overall value of an option is actually determined by six factors: strike price, the current market price of an underlying stock, dividend yield, prime interest rate, proximity to the expiration date, and the volatility of the stock prices over the course of the option.

Because these six variables combine in different ways to affect the value of an option, it is possible for the price of the underlying stock to increase while the value of the option falls. The Black Scholes formula may fail when other factors are affecting the value of the option more than the current stock price.

American option pricing uses a “discrete-time” model of the varying price over time of the underlying financial instrument.

risk disclosure

6th February 2019
A European Call option – What is it?
There are many differences between European and American styles in trading call options. Here are all.

By Guy Avtalyon

A European call option means an option for the right to buy a stock or an index at a certain price on a certain date. Notice the expression “on a certain date.” This “European style call option” is different from the “American style call option” that can be exercised at any time “BY a certain date.”

A European call option provides the investor with the right to purchase an asset, while a put option provides the investor with a right to sell it.

In other words, unlike an American option, the European option has no flexibility in the timing of exercise.

Formula

In theory, a European option has a lower value than an otherwise equivalent American option. It is because a European option does not enjoy the convenience that arises from the flexibility in the timing of exercise.

Value of a European Call Option = max (0, Asset Price − Exercise Price)
Value of a European Put Option = max (0, Exercise Price − Asset Price)

Asset price is the price of the underlying financial asset at the exercise date.

The exercise price is the price at which the option entitles its holder to sell or purchase the underlying financial asset.
Some examples

European call option

To differentiate between a European call option and an equivalent American call option we have to compare them here.
Let’s say, a trader bought 100 American call options stock. The option has an exercise price of $42 and an expiry date of 27 July 2018. The trader believes that stock price on 24th, 25th, and 26th of July is expected to be $43.5, $44.5, and $43.

Assuming a trader is very confident in owns projections, what is the maximum can gain on the options and when should exercise them?

Since trader bought American options, he/she can exercise them at any time before 27th. Based on the projections:

Value on 24th = max [0, $43.5 – $42] = $1.5
Value on 25th = max [0, $44.5 – $42] = $2.5
Value on 26th = max [0, $43 – $42] = $1

The trader should exercise the options on 25th and gain $2.5 per option.

But, the trader bought European options, and he/she would have been able to exercise them only on 26th July 2018 for a gain of $1 per option.

Assume that traders used European options instead of American options.

Solution

Since trader purchased European options which she can exercise only on the exercise date i.e. 26th July 2018 and not before, trader’s gain per option will be only $1 (i.e. option value at the exercise date = price of underlying asset ($43) minus exercise price ($42).

If the trader had bought American options, he/she could have exercised them on 25th July 2018 (the day it offered maximum gain) for per option gain of $2 (= $44.5 − $42).

Like their American Option counterparts, a European option is traded on an exchange. The contract will specify at least four variables.
- Underlying Asset: stock indexes, foreign currencies, as well as derivatives.
- Premium: the price paid when an option is purchased or sold.
- Strike Price: identifies the price at which the holder of the contract has a right to sell (put option) or buy (call option) the underlying asset.
- Maturity Date: also referred to as the expiry date; the option no longer has any value if not exercised on this date.
As is the American Options, European-style options also come in two basic forms:

Call Options: also named calls. This contract gives the holder the right to purchase the asset at the strike price on the maturity date.

Put Option: also named puts. The contract gives the holder the right to sell the asset at the strike price on the maturity date.

Most stock or equity options in the U.S. are American Styles, whereas most index options traded in the U.S. are European style. Since you can’t actually “exercise an index option” and by the index, index options are cash-settled. Cash-settled means that your broker simply deposits the “in the money” amount at expiration.

What does the European style option mean for the trader?

It means that you are concerned ONLY with the price of the stock or index at its expiration. European style options tend to be cheaper than American style options because if a stock spike prior to expiration. An American style call option trader can profit on that increase in value. The European style option trader has to hope the price increase holds until expiration.

When to buy a European Call Option

If you think a stock price or index is going to go up, then you should buy a call option. Unluckily, you don’t get to select if you want to buy a European style option or an American style option. That decision is already made by the exchange that the option trades on. Most index options in the U.S are European style. Take a look at the chart below:

Example of a European Call Option

If you bought an S&P500 Index option, it would be a European style option. That means that you can only exercise the option on the expiration date. Of course, it is still an option, which means that you have the right but not the obligation to exercise it.

Obviously, if you have a call option and the Index closes below the strike price on the expiration date then you would not exercise it. And that option would just expire worthlessly. Likewise, if you have a put option on the Index and the Index closes above the strike price on the expiration date then you would not exercise it. And that option would just expire worthlessly, too.
Notice in the chart above that the S&P500 Index (SPX) is a European style while the S&P100 (OEX) is American style.

In the U.S., most equity and index options contracts expire on the 3rd Friday of the month. Also, note that in the U.S. most contracts allow you to exercise your option at any time prior to the expiration date. In contrast, most European options only allow you to exercise the option on the expiration date.
5th February 2019
Stop loss hunting – What to do?
3 min read

The truth is, there are players in the market that are hunting your stop loss.

Stop loss orders are designed to limit the amount of money that can be lost on a single trade, by exiting the trade when a specific price is reached.

For example, a trader might buy a stock at $50 expecting it to rise. Trader place a stop loss order at $47. But the price goes against the trader’s expectations and reaches $47. In that case, the stop loss order will be executed, limiting the loss to $3 per share.

All new traders should use a stop loss. The stop loss order is placed when the trader enters a position.

Why is that so important?

Markets are moving very quickly. A stop-loss is employed to limit the possibility of a loss. It also gives the possibility to trader having to get out of the trade if the price goes against him.

Stop loss is a must.

Stop loss position is very important and you should be able to distinguish where to set it. A too tight stop loss can be easily triggered even when you take the right position. And a too wide stop loss is like having no stop loss at all.

Where is the best place to set the stop loss?

You should place the stop loss at the level that will be triggered when your position is totally wrong.

We are referring to stop orders going forward, plain vanilla stop order, opposed to a stop limit order.

For example, the price is going up. You are waiting for some reversal signal. But, the price changes its direction and makes a reversal trade setup. And then starts going down. You take a short position. So the last high that the price has made before it goes down is a resistance level.

But what if you realized that taking a short position has been a wrong decision and the price will keep on going up again?

If the price goes up and breaks above the resistance level, it means you were wrong and the uptrend was not reversed. Therefore, you have to be out. That is why professional traders say: You are either right, or you should be out.
So where should you place the stop loss in this example?

image source: tradingwithrayner.com

A few pips above the last high (resistance level) plus the spread.

When price moves to your preferred direction and you are making the profit, you can move the stop loss further to lock some part of the profit you have made. At least, you can move the stop loss to breakeven, entry price, when you are in a reasonable profit. So, if the market turns around, you will get out with zero loss.

First of all, what is stop loss hunting?

Do you know that forex brokers make money when you take a position? Yes. They charge you some pips when you buy a currency pair. This number of pips that brokers charge when you buy currency pairs is called spread. Brokers offer different spreads for different currency pairs.

But, the spread is not the only way that forex brokers make money. It is one of the ways. They also make money through the swap. Market brokers make money through commission as well. However, the commission is the only legal way of making money for the true ECN/STP brokers. They can make money through other ways, but they are not allowed to.

Short note: STP refers to Straight Through Processing and it is just a name given to dealing desk brokers that have automated the dealing process. Traditionally in the spot forex market, when you place a trade, you are being filled by your forex broker is also known as an RFED.

ECN refers to Electronic Communication Network. ECN can best be described as a bridge linking smaller market participants with its liquidity providers through a FOREX ECN Broker.

However, whatever you pay as the spread goes to the market maker broker pocket. Also, the money you lose is the market maker broker profit. Say that, when you trade Forex through a market maker broker, in fact, you are trading with the broker, not the real currency market.

So it makes sense that the market maker brokers like you to lose.

Your loss is their profit. Similar, it is expected they don’t want you to win because your profit is their loss. Market make brokers make a lot of money. The statistic shows that 99% of the trader lose on their own and nobody needs to push them to lose. However, some market maker brokers get greedier and want to make more money faster.

YOU WOULD LIKE TO READ Automatic Trading – What Is It

Stop loss hunting is one of the ways they use to do that. They have some special robots or train some employees who monitor the clients’ trades.

How does it work?

The trader takes a short position and sets a stop loss. The market goes against the position and becomes so close to the stop loss. And the robot or the stop loss hunter employee increases the spread manually to help the price hit the stop loss earlier.

But, most regulated brokers are not hunting your stop loss because it’s not worth the risk.

The word gets out that some broker hunts their client stops loss. What? It’s a matter of time before clients pull out of their account and join a new broker.

Would you want to risk doing that over a few tiny pips?

We guess not.

Most brokers don’t hunt your stops as the risk is greater than the reward.

But, your broker widens the spread and stops you out of your trade.

There is a reason for this.

A broker widens their spreads during major news release. The market has low liquidity during this period.

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Take a look at the depth of the market. The bids and offers are low just before the major news release. The participants in the market are pulling out their orders ahead of the news release.

The liquidity during such period is thin and that results in a wider spread.

Because of this, the spreads in forex is widener. If it isn’t, there will be opportunities for arbitrage.

So, you can see that widening is not there for fun their spread for fun. Your broker is doing it to protect themselves.
Most brokers don’t hunt your stop loss because it’s bad for business.

How to avoid stop loss hunting by setting a proper stop loss

Let’s say, you find such broker.

You can still protect yourself and beat the sharks who are hunting your stops.

What can you do?

Here are 3 techniques you can use:
- Don’t place your stop loss just below Support (or above Resistance)
image source: bpcdn.co
- Don’t place your stop loss at an arbitrary level
- Set your stop loss at a level where it invalidates your trading setup
The bottom line

The one way to stay away from the stop loss hunting is trading through a bank account.

Trading the longer time frames is another way of staying away from stop loss hunting. Well, nothing can 100% prevent a scam broker from cheating the clients. But trading the longer time frames is a good way to lower the risk. On that way, you will have wide stop loss orders that are harder to get hunt unless the broker increases the spread for hundreds of pips.

In general, you will finally have to close your account and leave when you trade with a scam broker that hunts your stop losses and cheats because nothing that fully stops them from cheating you.

Therefore, you’d better choose a good broker from the first day or trade through a bank account.

risk disclosure
4th February 2019
Twitter CEO Jack Dorsey thinks Bitcoin will be the Currency of the Internet

Twitter’s Jack Dorsey believes that BTC will be the common currency of the Interner

By Gorica Gligorijevic

Twitter CEO, also CEO of Square says there will be a native currency for the internet. Jack Dorsey, CEO of Twitter and the mastermind behind the popular money transfer application “Cash App,” shared his confidence about Bitcoin.

Appearing on the Joe Rogan Experience podcast, he stated that the Internet will eventually have a currency, which he thinks will likely be Bitcoin.

Jack Dorsey explained that he still feels that BTC meets all the conditions to become the common currency of the internet in the future.

For Twitter and Square chief, Bitcoin, the top-ranked cryptocurrency seems best-suited to that role.

No plans, just personal view

Jack Dorsey said that he has no plans for that at the moment, however, he expressed his personal view towards cryptocurrency and the internet.

“I believe the Internet will have a native currency and I don’t know if it’s Bitcoin. I think it will be given all the tests it has been through and the principles behind it, how it was created. It was something that was born on the Internet, was developed on the Internet, was tested on the Internet, it is on the Internet.”

Jack Dorsey believes that the internet will have its native currency one day, although he doesn’t know what that would be.

Bitcoin could be the currency of the internet

But when he elaborates his opinion further, he says that it could be Bitcoin. His opinion is based on the tests Bitcoin has been through all this time, the principle behind its creation. And all of that happened on the internet.

Twitter CEO has no plans to create his own currency, but he wants to participate in the growing technology, which he said to have done through the CashApp project.

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Twitter CEO claimed that his company is the first publicly-traded company that offers crypto (Bitcoin) purchasing as a service.
Dorsey has made similar observations, commenting in May 2018 that Bitcoin should be the native currency of the Internet.

Thus, Dorsey says Square’s focus is solely on BTC with no present plans to offer support for other cryptocurrencies on the Square Cash App.

Speaking about Square’s decision to offer support for the largest cryptocurrency, Dorsey said it gave the company the ability to serve more people across the world far better than was possible using mainstream channels.

“We’d love to see something become the global currency. It enables more access, it allows us to serve more people and allows us to move faster around the world.”

Twitter CEO: The Internet is like one nation

Dorsey compared the Internet to a single nation that exists digitally. Hence, it only makes sense that it would have its own universally accepted currency.

Present-day fiat money is usually subject to nationalistic policies that might not appeal to different places across the globe. Bitcoin, however, is based purely on mathematical algorithms providing a certain sense of neutrality and universality devoid of any geographical or political bias.

Jack Dorsey thinks the internet will eventually have its own currency and BTC is out in front in the race to be the chosen crypto. Twitter CEO doesn’t necessarily think mass adoption is near, but that worldwide cryptocurrency use will take hold soon.

Banks don’t like Bitcoin’s disruption

As the first and still biggest cryptocurrency, it’s not a bad bet. Bitcoin processed an incredible $9 billion in the past 24 hours, dwarfing any other blockchain by miles.

Bitcoin, moreover, is the most integrated crypto. It remains still the only one to have regulated futures, its logo stands for the blockchain and it has a brand.

Dorsey also mentioned the attitude of banks towards Bitcoin. Unsurprisingly, banks and many other financial institutions aren’t fans of Bitcoin’s disruptive tendencies, the Twitter CEO said.

YOU WOULD LIKE TO READ: Two of the richest men in the world call Bitcoin “rat poison”

JPMorgan analysts released, in January, a report claiming that BTC’s value could only exist in a dystopian economy. In 2018, Warren Buffet called Bitcoin “rat poison squared.”

“People treating BTC like virtual gold,” said Twitter CEO

“We notice that people are treating it (Bitcoin) as an asset, like virtual gold. We want to make it easy, just the simplest way to buy and sell Bitcoin. But we also knew that it had to come with a lot of educations, a lot of constraints,” said Dorsey.

Reminding what happened 3 years ago, when people had the “unhealthy way” of purchasing Bitcoin by using their life savings, Dorsey decided to put a very “simple” restriction and constraint on his app.

“You can’t buy Bitcoin on CashApp with a credit card. It has to be the money you actually have in it. We look for day trading which we discouraged and shut down, that’s not what we’re trying to build, that’s not what we’re trying to optimize.”

When the master of industry like Jack Dorsey speaks about the efficiency of cryptocurrency tends to lead to ecstatic investors. However, Dorsey has warned against wild speculation and hopes to push the public towards using digital currency rather than the narrow mentality of “hodl” and wait for riches.

3rd February 2019
QuadrigaCX CEO died – no one has access to cold storage

Founder of QuadrigaCX, 30-year-old Gerald Cotten, unexpectedly had died in December while in India, from Crohn’s disease. He reportedly had sole access to the cold wallet. QuadrigaCX owes its customers $190 million and cannot access most of the funds.

According to a Jan. 31 affidavits filed by his widow Jennifer Robertson and dug up by Coindesk, Cotten had sole access to most of the exchange’s $190 million worth of crypto held in cold storage.

No one appears to be able to access QuadrigaCX

Because when he died, Cotten took the keys with him.

His death is a very sad moment for the family, big loss, of course. But customers are in sorrow, too.

In a sworn affidavit filed Jan. 31 with the Nova Scotia Supreme Court, Jennifer Robertson, identified as the widow of QuadrigaCX founder Gerald Cotten, said the exchange owes its customers roughly $250 million CAD ($190 million) in both cryptocurrency and fiat.

The customers of QuadrigaCX seem to be really worried as the Canadian crypto exchange can no longer access its cold storage and it owes its customers nearly $190 million, according to a report by CoinDesk.

QuadrigaCX went offline a few days ago.

Initially, it was thought that routine maintenance was the cause of the sudden malfunction. But now it seems that there is something bigger behind. Bigger than what was initially thought. Reddit users are saying it is just another ‘Exit Scam’.

However, Quadriga users, are now concerned that the unannounced downtime for the QuadrigaCX website, is a sign that something might be very wrong with the crypto exchange.

Users correspond

Some Reddit users asked if QuadrigaCX shouldn’t have let their customers know before taking its site down. Another Reddit user speculated as to whether the exchange had gone bankrupt due to an inability to find a suitable bank to host an account and facilitate transfers.

Reddit users are asking for proof of death, while one user claimed that the exchange, most likely, couldn’t access assets in cold storage, as the keys were only known to Cotten.

According to the affidavit, the cryptocurrency exchange holds nearly 26,500 Bitcoin ($92.3 million USD), 11,000 Bitcoin Cash ($1.3 million), 11,000 Bitcoin Cash SV ($707,000), 35,000 Bitcoin Gold ($352,000), nearly 200,000 Litecoin ($6.5 million) and about 430,000 Ether ($46 million), amounting to nearly $147 million.

Speaking about the current difficult situation, Jennifer Robertson said, “The normal procedure was that QuadrigaCX founder and CEO Gerald Cotten would move the majority of the coins to cold storage as a way to protect the coins from hacking or other virtual theft.”

She also added that the sole responsibility of handling the funds remained with Gerald Cotten and no one else has access to the exchange’s cold wallet.

The board of the company encouraged its customers.

They stated that the issue is being handled in the best possible way and an affidavit has been filed in the Nova Scotia Court requesting the authority to appoint a third party to help the exchange in finding a solution for the problem.

If the application for creditor protection is accepted by the Courts, then the court might give QuadrigaCX at least 30 days of protection from its creditors.

There is also a possibility that some of Quadriga funds are being stored on other exchanges, though this has not been confirmed.

The Courts will rule on the request for creditor protection on February 5.

Seems a bit suspicious that Gerald Cotten was the only one that had access to these coins. It is really hard to believe.

But the whole enigma about crypto exchange QuadrigaCX become weirder because they claimed they used multi-sign wallets.

It looks entirely as the result of poor governance and processes and that’s why we need regulated exchanges.

2nd February 2019
Bad credit loan – How to improve the financial health

If you have no other option you’ll take a bad credit loan. But it isn’t the end of the world.

By Guy Avtalyon

Bad credit loan isn’t the end of the world. Here are several ways how to overcome them. I’m gonna introduce some of them.

What is a bad credit loan?

In the first place, let me be clear about what is a bad credit loan.

A bad credit loan is a relief option for consumers whose low credit scores limit their borrowing options. In other words, a bad credit loan, or just another name for a personal loan, can secure you out of a financial emergency. Even if your credit score is lower than you would like it.

The good thing is that you can get a loan with bad credit, but it’s harder to get a good deal.

Yes, I know! Nobody likes to be judged. But when it comes to loans, creditors are going to look deep into your credit history and make a decision about whether or not to lend to you.

They need to define how risky it would be to lend money to a borrower. And if you’ve got bad credit, you could expect to show you the exit space. But, even if you have bad credit, there may be ways to get a loan. Here’s how.

You can get a loan from a bank, but if you’re looking for a reasonable interest rate and adjustable qualifying requirements, you better don’t even think to open that door. Even than, you have several options available. But you have to know that loans are typically more expensive.

With low credit scores is easy to slip into expensive traps. But a bit of homework can help you avoid the problems. After you prove you’re able to repay on time, it shouldn’t be hard to rebuild credit so that it’s easier to borrow next time.

How credit scores and credit reports can fix bad credit loan

Keep in mind that bad credit has different meanings to different lenders. Lenders know your credit score, and you should too. So, check out your credit reports. Especially if your credit card issuer reports to the consumer credit bureaus. This is important because some of the information contained in them is necessary to calculate your credit scores.

You’ll want to make sure there are no incorrect derogatory marks on your reports before applying for a loan. The major consumer credit bureaus aren’t perfect, so it’s important to read your credit reports carefully. If there are false negative marks, you should contact the specific credit reporting company.

Along with correct information, the provider will remove the error.

Your credit scores are important, too. Your credit scores, along with other factors, can affect your approval odds for a loan and the terms you qualify for. Don’t be discouraged if your scores are not what you’d like. A little bit of work could help put your scores in better shape.

How to improve your credit status

So, it’s time to start improving your credit status. Your scores are calculated using different credit factors and scoring models. Just be focused on the factors with the greatest influence. For example, payment history is one of them, but check out everything to improve your credit overall score.

You can’t change the past, but make all of your current payments for at least the minimum amount. And on time. This is key for payment history.

Speaking about usage, keep the amount of debt you owe low compared to your total credit limit, ideally less than 30%. Maxed-out or over-the-limit lines of credit can be particularly harmful. Also, keeping old accounts open instead of closing accounts after they are paid off can help increase your credit history length.
Mix. Frankly, you shouldn’t apply for a new type of credit to influence your scores. But it can naturally grow over time as you experience major financial events, such as buying a home, for example.

But be careful. Applying for several new credit accounts in a short period of time can make you seem risky to lenders.
The best bet is opening new accounts only when necessary and when you know you can handle them responsibly.

Shop around to compare options

Shop around for loans, and include credit unions in your search. Those institutions may work with you even if you have bad credit. Credit unions are often smaller than large banks. Also, they are focused on the community. Usually, they will review your application personally and discuss it with you. If you sit across the desk from a human being, they can understand what you need.

So, it’s time to start shopping around for the best loan for you. Some people simply choose the first loan they’re approved for.

But, that could be a major mistake.

Different lenders may offer different interest rates and loan terms. Lenders have their own methods for evaluating these factors.

There is a selection of lenders and loan facilitators who can help low-credit applicants obtain affordable financing. But not all loan features are created equally.

For example, one lender may offer you a loan with a 19.99% annual percentage rate while another can offer you a loan with a 15.99% APR (annual percentage rate). If you don’t shop around and accept the first offer of 19.99% APR, you would be overpaying by 4 percentage points.

Shopping around for loans is easier than ever. We have the internet. Yes, you should check into your local options, such as banks and credit unions. But you can easily view the estimated loan terms of various online lenders in one place using the internet.

How to compare loan terms

If you have bad credit, the loan could be approved but also will cost you more. The lenders may recognize you as risky. Since personal loans for people with bad credit can be so much more expensive, it’s especially important to compare loan terms to find the best deal. To compare loan offers, there are a few basic terms to pay attention to.

Loan repayment period: Loan repayment period is the time frame in which you’ll have to repay the loan. Personal loans require fixed monthly payments for an established period. The longer the repayment period, the more interest you’ll pay, and the more the loan are likely to cost you.

Monthly payments: Monthly payments are determined by the amount you borrow, your interest rate, and your loan term. Make sure the payments are achievable.

Loan maximum and minimum: Lenders usually establish a minimum amount and maximum amount they’re willing to lend. A lender may not be well suitable for you if it won’t loan you enough money or if it requires you to borrow more than you want.

Annual Percentage Rate (APR): APR is the total cost you pay each year to borrow the money, including interest and fees. A lower APR means the loan will cost you less. If you want to take out a personal loan with bad credit, you’ll probably have a higher APR.

Try online lenders to fix bad credit loan

Peer-to-peer lending services are one option for getting a loan with bad credit. Instead of borrowing from banks, you can do it from individuals. They may be more willing to take the risk, but they’re not looking to lose their money.

These non-bank lenders have different risk tolerance and use different ways to evaluate your creditworthiness. Online loans evolve. They may approve you with lower credit scores.

Just be sure to avoid payday loans. They are costly short-term loans and they have heavy promotions online.

Use collateral

It isn’t the best choice, but if you have trouble getting approved, you may need to put up collateral. If you pledge something valuable, your lender will know you’re serious. In such a case, lenders will have a better chance of collecting on the loan because they can take your collateral and sell it.

But be extremely careful when pledging collateral. If you have a property, you can probably borrow against it. But the risks are worthy of your attention. If you can’t make all of your payments, you might be forced out of your home. Think twice to avoid making a bad situation even worse.

Some con artists take advantage of you when you’re down. They particularly target people who are urgent to borrow. These lenders charge enormous fees, so make it almost impossible to dig yourself out of debt.

Sometimes, you won’t even deal with a real lender: Scammers advertise loans, but you need to pay steep application fees upfront. In the end, you don’t get approval, and you don’t get your money back. This is well-known as an advance fee scam. Don’t pay upfront fees to get a personal loan. Any processing fees should come out of your loan proceeds.

Think more than twice about a payday loan

If you need money right away, need an amount less than what a traditional lender might be willing to give, or have been denied a personal loan because of poor credit, you may be tempted to try a payday loan.

A payday loan is a short-term loan for a small amount — usually $100 to $500 — that you secure by giving the lender a post-dated check or electronic access to automatically withdraw your bank account. The loan is usually due on your next pay date, along with fees. Depending on the state, payday lenders can charge from $10 to $30 per $100 you borrow.

According to research by The Pew Charitable Trusts, for example, if a payday lender charges you $15 for every $100 you borrow per two weeks, it amounts to an APR of 391%. The Pew research found that fees from online lenders can be even higher, averaging an APR of 652% as of April 2012.

Never mind where do you live, a payday lender may not check your credit in order to approve you for a loan. Many only require you to be an adult with an active bank or prepaid card account. Also, they will ask for proof of income and valid identification. It may be easy to get a payday loan when you have bad credit, but the high cost could make it difficult to repay.

Don’t take out a payday loans

Some studies found that many payday loan borrowers can’t repay their loans without taking out another payday loan.
High-cost payday lending is prohibited in some countries. Others set limits on how much payday lenders can loan.
The regulation varies from country to country.

If your credit scores are low and you need a loan right away, finding an online lender or some other source offering personal loans for borrowers with bad credit could be your best option.

Just proceed with caution and be sure to compare the terms of each loan to find the most affordable lender. But, if you can’t find such an option that you can easily repay, it may be better to wait and work on your credit.

Applying for loans, especially if done the wrong way, can further damage your credit.

1st February 2019
Personal finance – How to Manage?
Traders Paradise will walk you through some suggestions on how to manage money in your 20s

By Guy Avtalyon

Update on Feb 12, 2019

We received an email from our visitor Christopher Trum, Content Manager LendingTree Brands, that asked us:
”I was reading a recent article on Traders Paradise (traders-paradise.com/magazine/2019/01/personal-finance) and wanted to thank you for including data from our research study!”
With his permission, here is the link with full access to the original source
https://www.lendingtree.com/finance/places-millennials-carry-the-most-debt/

Personal finance is something that has to be well managed no matter how old is someone.

Who is going to take care of your own personal finance so early, for example in the 20s?
You may not think of your 20s as the time to buckle down financially. Between beginner salaries and student loans, many young people at their 20s bearly sustain to live from paycheck to paycheck. I know that. But what I also know is that your 20s are the best time to set the base for your financially secure existence. Yes, it is the right time to take care of your personal finance. Both, now and in the future.

Current status and future

You’ve probably graduated from college, started your first job, and are starting to make decisions on your own. Your adult life has just begun and retirement seems years away. But this is the right time to discuss your personal finance choices, how to manage your money responsibly, and to plan your financial future.

Personal finance exactly that: how you manage your money, your income, expenses, and savings, all of them. The truth is that you have to put an effort into managing your personal finances. In that way, you’ll better understand where your money is going. Also, you’ll better recognize if you have to make changes to meet your future financial goals.
Managing your personal finance better is something that can literally pay off. It can help you stay on top of your bills and save thousands of dollars each year. With that extra savings, you can pay off any debts you might have. Or maybe you would like to put that money towards your pension or spend them on your holiday or new car.

Create a budget to protect your personal finance

I know, for many of you creating a budget is critical. But without a budget, you’ll have difficulties to track your finances. Moreover, how will you identify key savings opportunities? So, if you don’t have one yet, take a time to map out your living costs.
Budgeting is the process of tracking your income, bills, and expenses in order to assess how much you can spend and what you can afford each month. Creating a budget and sticking to it is the foundation for personal financial success as it helps you to live within your means and avoid debt.

You don’t need any advanced tools to create a budget. All you need is to open up a spreadsheet on your laptops or phones and add your all expenses. It’s okay to add the random ones that pop up once a year. Then compare what you’re spending on what you’re earning. If the numbers don’t align, then you’ll need to work on making some changes to ensure that you leave yourself enough space for savings.

When creating a budget, you have to write down:
- Your income: How much are you making per pay period?
- Your expenses and payments: How much you spend on rent/mortgage, utilities, groceries, etc each month?
- Debts owed: How much do you owe for student loans, credit card debt, and similar?
Pay yourself first – Start your emergency savings

The recommendation is to pay yourself first. That means the first bill paid each month should be some paybacks if you have any. The second is to pay for utilities, put aside money for living buyings. And everything left over at the end of the month is your extra money. Open a savings account and put it there. The biggest mistake is the young people make is not saving early enough. They tend to put off savings until their 30s. That is wrong.

Just because you’re on the younger side doesn’t mean you’re immune to financial emergencies. Quite the contrary. Without emergency savings, you may have no choice but to get out costly loans. A better choice is to have an emergency fund. It has to be at least the amount you need for three months’ living expenses. Ideally, more like six months’ worth.

Having emergency savings is very important. In fact, it should trump any other financial aim you may have.
Let’s look at an example: Assuming you want to have $1 million in savings by the time you retire at age 65. This is how much you’ll need to invest each month:

Time is on your side when you’re young. You should save about 20% of your earnings. That should help you maintain your current lifestyle in retirement. If you want to travel more and more entertainment when retire, you should save about 30% of your earnings. That will help you have a lifestyle better than what you currently have.

A little bit of money saved now is going to make a big difference later in your personal finance.

Pay off present debt to secure personal finance

According to a recent study by LendingTree, the average millennial has an average of $24,000 in debt. This can paralyze your financial, and even your physical and mental health.

AVAILABLE FOR US residents ONLY

Large amounts of debt can seem daunting to pay off. Hence, it’s important to make a plan. You have to start paying it off quickly. Just include it in your budget as a monthly payment. But if you have more than one debt, which to pay off first?
You have to consolidate debt to one payment with a lower interest rate when possible.

But you may be more driven to try the debt avalanche or debt snowball methods of repayment.
Never focus on just one expense at a time.

If you owe money to a friend or family member and paying that debt off is a mental relief, pay that as first and then move on to other debts.

It’s important to make a plan to pay off and manage your debt to avoid heavy interest fees.

Get out of credit card debt

Credit cards are the worst enemy in anyone’s personal finance. Anyone who runs out of cash simply turns to credit cards. But can you afford to pay the balance? Combat the urge to use your credit cards for the shopping things you can’t afford.

The U.S. credit card debt increases every year. For example, the average household debt is nearly $16,000. So much!

The essential part of your good account balance is to eliminate the debt from the credit card as soon as possible. Actually, you’re wasting your hard-earned money on interest costs. By doing so you’ll have a double benefit: you’ll get out of debt and you’ll improve your credit score. And that is crucial if you plan to buy a home or lease a car in the near future.

Build credit

Never live above your resources and use credit for money that you don’t have. Never buy things on credit if you don’t have the resources to pay it off in full at the end of the month.

A credit report is a report that shows your credit history and is used to determine your creditworthiness. Building a strong credit history and maintaining a high credit score is essential for your financial health. In your early 20s, it’s important to build your credit by paying your credit cards and utilities on time but avoiding debt in the process. Instead, use a credit card to build credit. That could be a smart use example. Of course, if you can’t afford to pay it off by the end of the billing statement, you apparently can’t afford it.

It is important to make sure you don’t break the terms of your agreements. So even if you want to pay down added debt, you have to pay at least the minimum on your credit cards.

Investing your savings if you want to take care of your personal finance

When your savings start to grow, you can add more money to your pension. It’s a great way to make sure you’ll be able to live more comfortably later in life. Or you can make an investment plan based on your goals and timeframes.

If your savings goal is more than five years away, putting some of your cash into investments would allow you to earn more from your money and keep up with rising prices. Investments are something where you put your money to get a profit. You can choose from four main types of investment:

Shares – you buy a stake in a company
Cash – the savings you put in a bank or building society account
Property – you invest in a physical building, whether commercial or residential
Fixed interest securities bonds) – you loan your money to a company or government

There are other types of investments available too, including:

Collectibles, such as art and antiques
Commodities like oil, coffee, corn, rubber or gold
Contracts for difference, where you bet on shares gaining or losing value

The different assets owned by an investor are called a portfolio.

As a general rule, spreading money among the different asset classes will lower the risk of your overall portfolio. More on this you can find HERE.

For emergency savings, the best place for your cash is the bank. For long-term savings, investing in stocks is efficient for growing wealth. And you don’t need to take an extreme amount of risk. Sure, the stock market can be volatile, and it’s had its share of ups and downs through the years. But it’s also historically delivered a roughly 9% average annual return, which is about nine times more than what you’ll get from a savings account today.

The good news is, you don’t need to be an expert to enter the stock market. If you’re not comfy investing in a particular company, just put your money into exchange-traded funds or ETFs. These low-cost funds simply seek to track existing indexes, like the S&P 500, and because they offer instant diversification, they’re a less risky prospect than buying up individual companies’ stock.

Protect yourself financially

As you enter maturity, you’ll want to make sure that you are protecting yourself and your finances with adequate insurance. Take advantage of the benefits offered at work: health insurance, life insurance, short and long-term disability insurance. You may consider some benefit packages outside of your current work offers.

Fight for a higher salary if you want to take care of your personal finance.

Your 20s are a time to pay your dues but that doesn’t mean you shouldn’t fight for more money along the way. In fact, the more money you receive at your current job, the more you’ll probably get at your new job. So, boosting your salary won’t just put more money in your wallet now, but also throughout your working years.

Knowing how to manage your money and where start with financial planning can be terrifying and difficult. Especially when you’re in your 20s. Finances can be complicated, but it’s crucial to find out what is available to you. So, it’smart to start working on financial matters earlier rather than later in life.
31st January 2019
CRISIS – Analysts Have BLACK FORECAST FOR 2019

Analysts have black predictions for the coming year. The crisis is knocking the door.

By Traders-Paradise Team

We will face the worst crisis, which is the analysts’ prediction. Here is the selection of their statements.

“The European Union is about to implode this year.” investor Mitch Feierstein has predicted in a New Year episode of the Keiser Report. He also unveils which country will become the next Greece. The answer is surprising.

This year will be hard for Europe not only due to Brexit. The other member states could also bring the bloc down, according to Feierstein. “Nationwide protests in France are only the first sign of looming wider unrest,” the analyst stated to Russia Today.

“You are gonna see global unrest. I think you’ll it as a feature in Italy when the EU tries to bully them,” the British-American investor noted, citing infective “draconian austerity measures.”

But, not only Italy but also France could follow the fate of debt-ridden Greece, Feierstein warned. He noted the low approval rating of President Emmanuel Macron, rising unemployment, and huge wealth inequality in the country.

“Italy has got four trillion in loans they said there are not going repay… France has got a similar situation but they’ve got civil unrest with the population burning down Paris. So one of them will leave,” he predicted.

Both countries have been breaking EU budget rules.

After just one year of compliance in 2018, Paris announced that its budget deficit for 2019 is set to be 0.2 percent higher than the three percent threshold that the bloc’s rules allow. Brussels agreed to tolerate the breach. The same as it had been doing so for almost a decade before Macron’s presidency.

Italy has also been at loggerheads with the 28-nation union. Last year, the EU Commission wanted to put Italy in an economic disciplinary program over a serious breach of EU regulations on debt. The standoff between Rome and Brussels was settled only in mid-December when Italy agreed to a budget deal despite domestic criticism from the opposition.

But Mitch Feierstein is not alone.

The economist Nouriel Roubini, also known as Dr. Doom also warns that we are in the midst of a new asset bubble that could end in a crash bigger than that in 2008.

He made a list of 10 reasons why the world is at the threshold of a new crisis. Almost each of them begins and ends with a single name – Donald Trampa. But also insults on his account.

As the first reason for the new crisis, Nouriel recognizes the fiscal-stimulus policies that are currently pushing the annual US growth rate above its 2% potential are unsustainable. His opinion is that by 2020, the stimulus will run out, and a modest fiscal drag will pull growth from 3% to slightly below 2%.

Second, the US economy is now overheating, and inflation is rising above target. The US Federal Reserve will thus continue to raise the federal funds rate from its current 2% to at least 3.5% by 2020. That will likely push up short- and long-term interest rates as well as the US dollar.

“The inflation is also increasing in other key economies, and rising oil prices are contributing to additional inflationary pressures. That means the other major central banks will follow the Fed toward monetary-policy normalization, which will reduce global liquidity and put upward pressure on interest rates.” – wrote Nouriel for The Guardian in September last year.

In his explanation he wrote further:“… once a correction occurs, the risk of illiquidity and fire sales/undershooting will become more severe. There are reduced market-making and warehousing activities by broker-dealers. Excessive high-frequency/algorithmic trading will raise the likelihood of “flash crashes.” And fixed-income instruments have become more concentrated in open-ended exchange-traded and dedicated credit funds.”

A new recession wave is coming

Joze Mencinger, Slovenian lawyer, economist, and politician, believes that the world is waiting for a new wave of economic instability. He is also called the architect of the Slovenian transition.

“Lately most of the crisis has been due to a lack of demand, because, mankind has no problem on the supply side, we have a problem on the demand side. We can simply say that the production of a car is cheaper than its sale,” Mencinger believes.

If there is just one question in this test: is the world awaiting a new crisis? It is frightening, but these economists would complete a positive answer.

There are many indications that growth will slow down. And this is in a way accepted today by IMF and World Bank officials in projections for next years.

Contrary to these catastrophic forecasts, we have to notice. In order to make a recession, employment usually falls, and growth becomes negative, industrial production falls. All of these indicators are still strong and do not indicate that we are entering a recession. Of course, there are some events that can lead to it and this should be followed.

The American stock market killed by a strong word

December events on the US stock market are, of course, something to be watched.

It all began before the Catholic Christmas when American brokers had the worst Christmas Day ever. The stock indices seemed to have been riding on the roller-cruiser because they returned to the highest level since 2009 the next day. Blumberg described this situation as bizarre.

The financial sector overlooks the real sector. Because in the real sector there are no such swings.

And it looks that the term ”bizarre” is just fine.

It seems that in December last year the US stock market killed a too strong word. The market did not come as a result of the fact that the US Federal Reserve Administration raised interest rates. From the tightening of the monetary policy, the much worse exchange was a “verbal delict”.

The market is always sensitive to what the officials of powerful states declare.

And perhaps officials today are not completely aware of this, but their word affects the markets. This is not a new phenomenon. This is well known and therefore traditionally central bankers give very careful statements. The fact is that their word is analyzed and evaluated by the investment public. It can affect the movement of prices in the financial market.

The bubble pops off in one place, but the crisis arrives everywhere

Big crises are like blowing balloons. The bubble that began to swell at the end of December soon vanished.

And it’s just when the indexes have come close to nearly 20 percent. This is considered a border, after which what investors call “bear market”. This means that the stock market is on a descending path and that the bad days are coming. Fortunately, this time it did not happen.

But, unlike in 2008, the governments had the policy tools needed to prevent a free fall.

”The policymakers who must confront the next downturn will have their hands tied while overall debt levels are higher than during the previous crisis. When it comes, the next crisis and recession could be even more severe and prolonged than the last”, pointed Nouriel Roubini.

The truth is one if we enter the new crisis. People around the world will pay these costs, and this will guarantee profits primarily to the super-rich. After all, they own property. Whether it is a state tax, an increase in the purchase price of goods and services, or any fees for services.

With the cut of costs, the rest of the welfare state will make this enormous debt will pay billions of the people by their work and their mostly poor income.

30th January 2019
Leverage Trading Stocks – The More Leveraged the Better

3 min read

Leverage trading stocks is a concept that can enable you to multiply your exposure to a financial market without committing extra investment capital.

However, you need to understand leverage trading to help fully immerse yourself in the stock market.
The idea behind leverage trading stocks is to increase your potential payout on a play. However, it doesn’t always work out the way you want, and it can prove dangerous for your portfolio and trading account, especially when you’re new to the stock market.

Leverage is the ability to trade a large position with only a small amount of trading capital. We are sure you already find the articles that suggest that trading using leverage is risky. Also, you can find that new trader should only trade cash-based markets, like individual stock markets, and avoid trading highly leveraged markets.
Well, we disagree with this in full. Trading using leverage is no riskier than non-leveraged trading. Also, for certain types of trading, the more leverage that is used, there is the lower the risk.

What Is Leverage Trading Stocks?

In the stock market, leverage trading stocks are using borrowed shares from your broker to increase your position size in a play. So you can potentially make more money on the other side. Options trading, futures contracts, and buying on margin are all examples of leverage trading. But buying on margin is maybe the riskiest.

When you buy on margin, you’re essentially financing your position in the stock.

Actually, it’s just like buying new furniture. For example: Say you want a new kitchen and you talk the salesperson down to $25,000. You don’t have $25K in cash, so you put $2,000 down and finance $23,000 over five years. Every month, you pay the lender your furniture note. That includes the principal, which is the amount financed, and the interest, which is money paid to the lender in exchange for financing you.

People do this every day with i.g. cars and other physical kinds of stuff.

Well, it doesn’t sound so dangerous.

But even a furniture purchase can leave you in financial trouble.

Let’s say you put $2,000 down on your new kitchen and drive it off the lot. A few days later, you lost it in a fire accident. The insurance company pays the kitchen’s market value, which has already depreciated below what you paid for it. In other words, you have to keep paying off your kitchen note even though you don’t have a kitchen.
That’s what usually goes wrong with leverage trading.

How Does Leverage Trading Stocks Work?

Leverage trading stocks work by allowing you to borrow shares in stock from your broker.

For one example:

Let’s say you have $2,000 to invest. This amount could be invested in 20 shares of Microsoft stock. But in order to increase leverage, you could invest the $2,000 in five options contracts. You would have 1000 shares instead of just 20.

Instead of investing in options contracts, you can buy a certain number of shares. Leverage is always expressed as a ratio, such as 2:1. In that case, you could double your position size by borrowing twice what you actually buy.

When you exit your position, you’re responsible for paying back the broker for the shares you borrowed. Whatever you have left is your profit, minus your own initial investment in the shares.

2:1 leverage example

2:1 leverage means you can borrow twice the amount of your investment from your broker.

For example, you want to invest $50,000 in stock, but you only have $25,000 in your trading account. Using leverage, you could buy on margin at 2:1, giving you $50,000 to invest.

It doesn’t come free, of course. You have to make an initial deposit or down payment to your broker for the privilege of buying on margin.

But what happens to your investment?

Let’s say you bought $50,000 worth of stock at $50 per share. The stock climbs to $55, and you sell.

At that point, you have to return the borrowed shares or money to your broker. The brokerage firm extended $25,000, so you owe that back, plus any interest required. The rest you keep as profit.

If the stock price drops, though, you’ll still have to pay back your broker. Plus, you’ll have to cover any losses your broker incurred during the trade. And your own, too.

The Leverage is Incorrectly Considered Risky

Leverage can be highly risky because it can boost the potential profit. But also the loss that trade can make. For example, you make a trade with $1,000 of trading capital but has the potential to lose $10,000 of trading capital.

This is based on the theory that if a trader has $1,000 of trading capital, they should not be able to lose more than $1,000. Therefore should only be able to trade $1,000. Leverage allows the same $1,000 of trading capital to trade perhaps $5,000 worth of stock, which would all be at risk.

Well, this is theoretically correct. But it is the way that an inexperienced trader looks at leverage, and it is, therefore, the wrong way.

Leverage Is a High-Risk Strategy

There are no secrets, investing risk increases with reward. The higher the potential payout, the higher your risk for great losses. This is especially true when you’re trading with leverage because you’re playing with the house’s money.

Brokerage firms require margin account holders to maintain a certain minimum balance. Your cash and owned securities serve as collateral for whatever you’ve borrowed. It reduces the risk for the broker. Though, it increases your risk, because if you borrow too much on a losing position, your account can get wiped out instantly.

The Real Truth About Leverage Trading Stocks

Leverage is actually a very efficient use of trading capital. The professional traders value it because it allows them to trade large positions. Such as more contracts, or shares, etc. And with less trading capital. Leverage does not modify the potential profit or loss that trade can make. Contrary, it reduces the amount of trading capital that must be used, thereby releasing trading capital for other trades.

For example, you want to buy 1000 shares of stock at $20 per share. That would require maybe $5,000 of trading capital. So, the rest of your initial leaving the remaining $15,000 available for other trades.

This is the way that a professional trader looks at leverage. Therefore, this is the correct way.

The bottom line

Leverage trading can be a slippery slope.

On the other hand, the more leverage the better. Professional traders will choose highly leveraged markets over non-leveraged markets every time. Telling new traders to avoid trading using leverage is essentially telling them to trade like an amateur instead of a professional. Every time that pros trade a stock, they always use the highest leverage they can. They would never trade a stock without using leverage.

The next time that you are making a stock trade, consider using a leveraged market instead.

risk disclosure

29th January 2019