Because Finance & Trading Doesn't HAVE to Be Boring!

Archives

Tagged ‘finance‘
Big Corporations Are Voluntarily Cutting Off Russia

Big Corporations Are Voluntarily Cutting Off Russia

Even if they aren’t part of the sanctions,
many big companies are refusing to sell their products in Russia,
putting even more strain on the Russian economy

Governments aren’t the only ones squeezing the Russian economy. Dozens of large global corporations are following suit.

Even though they are not compelled to, an increasing number of enterprises are opting to shut their operations in Russia.

Apple (AAPL), Ikea, ExxonMobil, and General Motors are among the companies that have pulled out of Russia.

The corporations express alarm over Russia’s invasion of Ukraine, which has prompted considerable criticism in the United States and across Europe.

It’s not always clear if these big corporations are leaving to comply with official sanctions or for other reasons.

What is known is that there are several commercial reasons to avoid doing business with Russia.

First and foremost, there’s the issue of uncertainty. After all, why in the world would a company want to sell a product only to be paid back with quickly depreciating Russian currency? And why would you ship a car or a smartphone to Russia when you already have a huge demand for your product in western markets?

Sanctions against Russia’s financial industry may make recouping some of those losses difficult. Making things even more difficult for companies trying to conduct business in Russisa, Russia is putting restrictions on money leaving the country, so it’s getting harder to get paid for products already shipped..

“Businesses are asking themselves, ‘Do I want to continue where I don’t know if a contract I sign today will be completed weeks or months from now?'” said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center. “The Russian financial system is in such a state of turmoil that it is just too unclear. Businesses despise unpredictability and this is unpredictability on a grand scale.”

Even in a crisis like this, the significant number of enterprises leaving Russia is exceptional, according to Lipsky.

“In general, they’ll continue to invest in a market if there are possibilities to earn money,” he added. “However, there is widespread agreement that marketing these items is inappropriate. That’s a unique dynamic I’ve never seen before.”

Economics aside, one can wonder if there isn’t some peer pressure felt by companies still doing business with Russia as they see their competitors leaving …in the form of an unstated social and moral obligation where ceasing business operations becomes a symbolic gesture against the Russian invasion of Ukraine.

Even the Kremlin admits that the acts of firms all around the world are causing an economic catastrophe in its own country.

In a conference call with foreign media, Kremlin spokesman Dmitry Peskov remarked, “Russia’s economy is suffering heavy blows.” On Tuesday, state news agencies TASS and RIA cited Russian Prime Minister Mikhail Mishustin as stating that the Russian government is considering what actions it may take to prevent Western corporations from withdrawing funds from Russia.

One element that makes it simpler for corporations to abandon Russian enterprises is the country’s lack of global economic clout.

According to the International Monetary Fund, Russia’s GDP is around 25% lower than Italy’s and more than 20% lower than Canada’s, despite the fact that both countries have a fraction of Russia’s population.

It is primarily a supplier of energy and other commodities, such as wheat, timber, and a range of metals (including aluminum) – the majority of which are readily available elsewhere.

“There are other options,” Lipsky remarked. “Companies are able to identify those alternative markets and trading partners, as well as satisfy all of their shareholders’ fiduciary obligations.”They’ve decided that risking Russia isn’t worth it.”

In the energy market, there is a distinct aversion to risk. Several western nations have spared Russia’s oil industry from sanctions so far, in the hopes of averting global energy shortages and price rises.

However, despite severe reductions, much of the Russian oil on the market remains unsold. Given the severe restrictions imposed on Russian institutions, traders are unsure if any agreements they make for Russian oil will be able to be completed.

Finding oil tankers ready to call on Russian ports, as well as insurance firms willing to cover the ships and supplies, has been problematic.

All of this has resulted in a “de facto embargo” on Russian oil, according to oil expert Andy Lipow of Lipow Oil.

Big Corporations Are Voluntarily Cutting Off Russia

Get Hedge Fund Beating Options Trades Delivered to Your Inbox!

Tired of missing out on the huge gains in the market?

Wishing you knew which trades had the best odds of succeeding?

Would you like to know EXACTLY how & which trades to place WITHOUT having to spend years learning?

Well now you can let our Team of Trading Experts & Exclusive AI Trading Software do the work for you!

Click Here to Start Making Bank With Our Option Trade Alerts!

 

Wall Street Thinks Consumers Are Screwed

Wall Street Thinks Consumers Are Screwed

Wall Street shows where the market is headed as they short the retail sector… hard

Is the American shopper on the verge of tapping out?

Some Wall Street investors tend to believe that buyers are burnt out and have nothing left to spend.

According to a research released this week by S&P Global Market Intelligence, short selling in consumer stocks — effectively betting on the sector’s share prices falling — has reached a new high since January 2021.

“As of mid-February, the consumer discretionary sector remained the most-shorted sector, as short sellers continued to wager that skyrocketing inflation would eat into demand for nonessential products,” the S&P analysts wrote in the report.

This year, retailers Big 5 (BGFV) and Citi Trends (CTRN), electric vehicle charging company EVgo, plant-based food provider Beyond Meat (BYND), and dental braces producer SmileDirectClub have all been aggressively shorted (SDC).

The market is plainly concerned about whether consumers can endure future increases in oil and other commodity costs, as well as the Federal Reserve’s projected interest rate hikes.

The SPDR S&P Retail (XRT) and Consumer Discretionary Select Sector SPDR (XLY) exchange-traded funds have both lost almost 15% this year – falling way more than the rest of the market.

Inflation took a toll on Christmas shopping, resulting in a drop in consumer spending in December.

“The month of December was not especially favorable for retail,” said Phil Orlando, Federated Hermes’ chief equities market analyst. “And I’m being generous. It was a disaster.”

Although spending increased in January, Orlando claims that a large portion of the increase was attributable to the usage of Christmas gift cards, which are reported as retail sales when redeemed.

And now that energy prices are soaring, consumer spending may suffer much more.

With that in mind, Orlando believes consumer stocks will continue to suffer, particularly as increasing gasoline and gas prices, along with the likelihood of higher interest rates, are weighing on consumer confidence.

Furthermore, the pandemic’s stimulus checks have run out.

As a result, consumers would have to either take on additional debt or dip into their savings to maintain their current spending habits.

Orlando figures that the average consumer doesn’t have much buying ammunition left – if any at all.

The result? Retail stocks could crash & burn if consumer spending slows.

“Stocks are not going to recover in a couple of months,” said Phillip Toews, CEO of Toews Asset Management.

“The bear case was that, because to high inflation and increasing interest rates, we would be headed for a bear market before the [Russian] invasion,” Toews said. “Energy prices are now skyrocketing. Consumer equities may be part of a larger sell-off.”

Simply put: Consumer spending is what keeps the economy afloat.

If that’s cut off because of inflation and rising interest rates, the party could very well stop… plunging the economy into a full-blow recession.

Wall Street Thinks Consumers Are Screwed

 

Avoid The Dumpster Fire of Trading On Your Own:
Get Hedge Fund Beating Options Trades Delivered to Your Inbox!

Tired of missing out on the huge gains in the market?

Wishing you knew which trades had the best odds of succeeding?

Would you like to know EXACTLY how & which trades to place WITHOUT having to spend years learning?

Well now you can let our Team of Trading Experts & Exclusive AI Trading Software do the work for you!

Click Here to Start Making Bank With Our Option Trade Alerts!

 

Russian Invasion of Ukraine Intensifies, S&P and DOW Spike Higher

Russian Invasion of Ukraine Intensifies, S&P and DOW Spike Higher

Russia’s war on Ukraine becomes worse.
S&P 500 and DOW Jones: “Meh, let’s get back to what’s really important – chasing all time highs!”

 

Despite a sustained rise in oil prices, stocks climbed on Wednesday, despite the escalating confrontation between Russia and Ukraine.

The Dow Jones Industrial Average increased by 233 points, or 0.7%. The S&P 500 rose 0.5 percent, but the Nasdaq Composite, which is heavily weighted in technology, dipped marginally.

The adjustments came as oil prices continued to rise, building on a big surge from the day before.

Both U.S. oil futures and international benchmark Brent crude futures climbed by roughly 6% apiece. Brent was trading at $112.02 and West Texas Intermediate was at $110.06.

Wall Street wants to take a departure from the defensive playbook and avoid stocks in utilities, healthcare, and consumer staples. In a message to clients, Oanda senior market analyst Edward Moya wrote, “With oil prices and Treasury rates climbing so much today, it’s no wonder energy and financials are leading the open higher.”

The stock market rose as a result of positive corporate news. Ford’s stock rose 4.6 percent after the company said it will divide its electric car and legacy manufacturing divisions into two distinct firms. Salesforce climbed 1.7 percent after reporting fourth-quarter earnings that exceeded expectations on both the top and bottom lines.

On Wednesday, Fed Chair Jerome Powell will give his semiannual monetary policy brief to Congress. Despite the “very unpredictable” impact of the crisis in Ukraine, the Fed’s chairman indicated that rate rises are expected to begin this month, and that the Fed will make headway but not complete a plan to decrease its balance sheet.

“The ultimate conclusion is that we will proceed,” Powell said,”but we will go cautiously as we learn more about the economic repercussions of the Ukraine war.”

Oil’s rise looked to benefit energy companies, with Exxon and Chevron both up nearly 2% in early trade.

However, rising energy costs have heightened fears of inflation and a potential slowdown in the economy. The index’s gains on Wednesday morning pared losses from the previous session, which included a significant increase in oil prices.

“Yesterday’s price action, which saw Fed tightening expectations pushed out, global yields plummet, the US dollar and gold strengthen, and equity markets (ex-Energy) selloff sharply, strongly suggests that investors are increasingly pricing in a potential sharp slowdown,” said Chris Senyek of Wolfe Research in a note to clients.

Government bond yields rose on Wednesday as well. After dipping below 1.7 percent the day before, the benchmark 10-year note recently yielded close to 1.8 percent. Bank stocks looked to benefit from the reversal, with Wells Fargo jumping 2.4 percent.

Investors were on edge Wednesday after news that Russian military had infiltrated Kherson and encircled Mariupol, two crucial cities in the country’s south.

In prolonged trade, earnings lifted numerous other equities. Nordstrom’s stock soared more than 30% after reporting solid results, while SoFi’s stock increased by about 10%.

On the negative, First Solar’s stock dropped more than 15% after the business missed revenue projections and provided poor outlook. After disclosing new financial targets, Citi fell 3.5 percent.

Investors are also anticipating Friday’s release of a critical jobs report. According to ADP, private enterprises in the United States gained 475,000 jobs in February. Dow Jones polled economists, who predicted 400,000. The company also raised its January figures.

The Dow Jones Industrial Average plummeted 597 points, or 1.76 percent, in Tuesday’s trade. The S&P 500 index fell 1.55 percent, while the Nasdaq Composite dropped 1.59 percent. All are rebounding today.

Several IT businesses are slated to report earnings on Wednesday, continuing the earnings season. After the market closes, Okta, Pure Storage, and C3 AI will report. After the bell, ChargePoint is also expected to report.

While the Ukraine battles for its freedom, the financial markets seem indifferent as they continue to lift on any hope of positive news.

 

Russian Invasion of Ukraine Intensifies SP and DOW Spike Higher

 

Get Hedge Fund Beating Options Trades Delivered to Your Inbox!

Tired of missing out on the huge gains in the market?

Wishing you knew which trades had the best odds of succeeding?

Would you like to know EXACTLY how & which trades to place WITHOUT having to spend years learning?

Well now you can let our Team of Trading Experts & Exclusive AI Trading Software do the work for you!

Click Here to Start Making Bank With Our Option Trade Alerts!

PS – Our trades have returned QUADRUPLE digit yearly returns over the past 4 years.

 

Powell’s Dilemma: Damned If You Do, Damned If You Don’t

Powell’s Dilemma: Damned If You Do, Damned If You Don’t

Congress expects Powell to fight inflation,
but to do that he has to raise interest rates which will tank the stock market.

Time to fire up the FED’s trusty rhetoric machine to keep everyone happy.

At a time when markets anticipate the Fed to do less, Federal Reserve Chairman Jerome Powell is expected to tell Congress this week that the central bank will do more to manage inflation.

Fears of a Russian invasion of Ukraine have caused financial markets to tremble, and Wall Street has discreetly lowered its expectations for Fed action.

Markets had expected the Fed to hike interest rates seven times in 2022, but current pricing suggests just five movements. This would imply raising the Federal Reserve’s benchmark short-term borrowing rate by around 125 basis points, to a range of 1.25 percent to 1.5 percent.

Powell will have to walk a tightrope as he testifies before Congress during two days of hearing that his institution is devoted to managing inflation while also keeping an eye on global turbulence.

“He’ll have to thread a very fine needle. It’ll be a difficult balancing act,” said Mark Zandi, chief economist of Moody’s Analytics. “My impression is that he starts with the uncertainty that this all generates, given that the Russian invasion may go in a variety of directions, each one worse than the last. He’ll emphasize that in such a tumultuous era, it could make sense for the Fed to be a bit more careful in implementing policy.”

Markets had been anticipating 25 basis point rises from the governing Federal Open Market Committee at each of its remaining seven sessions this year until about a week ago. At the March 15-16 meeting, there was even a significant tendency toward the initial step being 50 basis points.

At least for the time being,  it would seem that Russia’s invasion has taken that option off the table.

“His best message would be to play it by ear,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, says that Powell’s best move would be to tell everyone that he will “play it by ear.” Boockvar thinks this will let him escape the difficult position he finds himself in right now, while using the Russian invasion as an excuse to see where the economy goes from here, before they will buckle down and deal with inflation.

After all, the can has been kicked down the road for years now… what difference will waiting a couple months longer make?

Economists forecast robust growth this year, but a little lower than in 2021, which was the greatest since 1984. In December, Fed policymakers predicted that GDP would grow at a 4% annual rate in 2022.

However, the Fed’s policy outlook is complicated by persistent inflation, which is at its highest level in 40 years, as well as the possibility that the Russia-Ukraine scenario would add to inflation and further disrupt supply chains.

“We’re approaching a stagflationary moment,” Boockvar added, alluding to high inflation and slow growth. “The issue is whether [Powell] is more concerned with the’stag’ or the ‘flation’?”

The Fed has largely focused on growth after the Volcker style era of handling monetary policy.

Other Economists Aren’t So Sure

Goldman Sachs said in a letter to clients on Sunday that this year’s “quite strong inflation” “should create an easy case” for seven rate rises.

The market has been a bit too quick to price-out the potential for a 50 [basis point] hike at this month’s FOMC meeting, according to Citigroup economist Andrew Hollenhorst on Tuesday.

Nonetheless, according to the CME Group, as of Tuesday midday, the market had fully discounted a half-percentage-point increase and had given a small chance to no movement at all.

Because futures pricing is variable, the odds of a reversal might occur if inflation slows or the Ukraine issue is addressed.

Powell will have to confront a wide variety of opinions on where the Fed should be at a key moment for monetary policy when he delivers his obligatory semiannual briefing before a House panel on Wednesday and then to a Senate committee on Thursday.

“We believe Powell will stress that, despite increased geopolitical uncertainty, the Fed remains focused on its macro objectives and will continue to move forward with policy normalization with the goal of bringing inflation back to target while maintaining employment,” says Krishna Guha, Evercore ISI’s head of central bank policy strategy.

“We believe he will recognize that the Russia-Ukraine conflict, with its stagflationary push from higher energy prices (inflation higher, growth lower), presents new policy concerns,” Guha said.

Regardless of the outcome, both sides expect Powell to take action.

But any course of action he takes will come with significant risks.

Delaying and hoping for things to cool off is his most likely move.

 

The Best Decision You’ll Ever Make is Signing Up For Our Trade Alerts

Tired of missing out on the huge gains in the market?

Wishing you knew which trades had the best odds of succeeding?

Would you like to know EXACTLY how & which trades to place WITHOUT having to spend years learning?

Well now you can let our Team of Trading Experts & Exclusive AI Trading Software do the work for you!

Click Here to Start Making Bank With Our Option Trade Alerts!

 

Powells Dilemma Damned If You Do Damned If You Dont

The Market & WSB Apes Give Robinhood Stock a Fantastic Monkey-Hammering

The Market & WSB Apes Give Robinhood Stock a Fantastic Monkey-Hammering

Robinhood Markets Inc. has already had a month that would make Idi Amin blush. (That’s bad)

The stock continued drifting lower as this month (and Covid) continued to drag on.

And then things went about as well as a partner admitting to infidelity, as they shocked Wall Street with financial reports about stagnant growth and a gloomy prognosis for the current quarter.

And in “jilted lover” type fashion at 9:30 a.m. on Friday, investors punished Robinhood, sending their shares plummeting by 13%.

Between the rough start to the year and the monkey-hammering that investors gave them, the stock has lost about $29 billion since it first went public in July.

But what are numbers and valuations good for anyways? After all, we print money out of thin air, artificially suppress interest rates and reward companies with negative earnings by giving them higher stock prices.

Wait, this just in: Tech companies from the year 2000 called…

So Robinhood has missed its targets and they’ve suddenly turned pessimistic on how they can boost their stock price back up.

It seems the killer for them was the death of WallStreetBets’ meme stocks, as Robinhood was the brokerage of choice for new traders who signed up in the hopes of riding the wave to ape superstardom. (“Don’t worry Mom! When GME hits I’ll be able to buy my own house and finally move out of the basement!”)

New users flocked to Robinhood by the thousands, engorging their user base in the process.

But with WSB posts down to about 1,000 posts a day from almost 64,000 (!!!!!!), it’s safe to assume interest has waned a little.

Well, that and the fact that the market share for single stock options for THE ENTIRE STOCK MARKET has fallen about 10%. (Single stock options were a favorite among all the WSB degens.)

For the volume to be about 10% of the options interest market, it shows you how hot and heavy the apes were hittin’ it as they got their trade tip from WallStreetBets and YOLO’d their way over to their brokerage account.

But I’m sure Robinhood has a plan to right the ship.

And on the earnings call they pulled back the curtain a little, allowing the rest of us pleebs to see what they have in mind!! Yay!!

Their executives talked about some of their plans for new business lines. (“Yes, new business lines! That’ll stop the beatings.”)

But, to be fair, if you’re facing a grim future and have the negative data to prove it, you’ve got to say SOMETHING on the earnings call.

Just letting the awkward silence continue before the crickets chime in isn’t going to fare well.

Right, so when your tail’s caught in a crack, you’ve got to say something, right?

So Robinhood came up with… wait for it… adding tax-advantaged retirement accounts and fully funded lending.

(Did you just fall off your chair in boredom – while intentionally hitting your head on the ground, hoping to erase the memory of what you just heard – before voluntarily slipping into a coma like I did? No? Ok, so it was just me then. Interesting… Maybe I should get that checked out.)

But wait! All is not lost. While they were at it, they assured investors they were working on plans for foreign expansion.

Ah yes, the whole “foreign expansion” line. That’s where you kick the can of accountability down the road by using an unspecific course of action and vague time frame.

Yes, that’ll work.

But in a stunning turn of events, just like the jilted lover forgiving the misdeeds of their dirtbag partner, it did work!

Rather than rubbing their nose in it, the market pushed Robinhood’s share price back up from their low of $9.97 to $12.73 at the close of the market.

This is still well below the high of $70.39 back on August 4th (and the bearish trend continues when you look at the chart over a 1 year time frame) but this significant bounce seemed have the market saying to Robinhood, “Naw, I ain’t mad at ya bro.”

So overall, a sort of negative day for Robinhood?

At least going forward the prospects look pretty grim.

But on a more positive note:

 

Get More Irreverence Delivered to Your Inbox!

If you’d like more of this kind of quirk, sign up for The Minister of Capitalism’s email list, where he keeps his best and most ingenious thoughts.

Signing up will inject you with frequent doses of his dopamine-laced, irreverent ideas which might just make you more intelligent, funny and interesting.*

Click Here to Sign Up!

*Of course, they might not do any of those things.

Investing in Options: A Beginner’s Guide

Investing in Options: A Beginner’s Guide

What direction, how much, and when will the stock price change? These are all questions you need to know in order to successfully trade stock options.

Of course, you could skip all that and just follow the trade alerts (up to 95.918% trade win rate!) that The Empirical Collective sends out.

Stock options trading is more complicated than stock trading. Your broker will fulfill your order at the current market price or a price you select as long as you specify the number of contracts you desire. To create a trading account for options trading, you’ll need to have some knowledge of tactics that are a little more sophisticated than trading stocks.

A step-by-step guide to options trading

Open a trading account for options

Trading options require a certain level of expertise, and because of this there are a few extra requirements before you can get started. Creating an options trading account is more expensive than opening a brokerage account for stock trading. When it comes to options trading, brokers want a little more information about the person they’re dealing with before they permit them to open an account.

To analyze the expertise, knowledge of risks, and financial preparation of potential options traders, brokerage companies conduct screenings. An options trading agreement will be used to obtain broker clearance for these facts.

(Please note: The requirements can vary from broker to broker and will depend on the trading account and options trading level you’re applying for. For a basic options trading account, some brokers only require a little extra capital in order to approve your account.)

Some brokers require you to supply your:

  • Aims in investing. Income, expansion, preservation of capital, and speculative activities all fall under this category.
  • Experience in trading. The broker needs to know how much you know about investing, the length of time you’ve been trading stocks or options, and the number of your trades.
  • The specifics of your financial situation. This can include how much cash you have on hand, your annual income, overall net worth, and information about your job.
  • Choosing the trade set ups. Some brokers will quiz you on your understanding of options. For example, they may ask you to explain a  spread, a call, or a put. They may also ask you the difference between covered and naked options.

The broker normally provides you an initial trading level based on the degree of risk you indicate in your responses (typically 1 to 5, with 1 being the lowest risk and 5 being the highest). You’ll need this if you want to trade in specific types of options.

You need to screen your broker!

Choosing a broker to trade options with is the most critical decision you will make. For investors who are new to options trading, finding a broker that provides the tools, information, guidance, and support you need is critical.

Decide whether to purchase or sell certain options

Call options are contracts that allow you to buy a stock at a specified price (the strike price), but you aren’t obligated to do so.

An option to sell shares at a certain price before the contract expires is known as a “put.” (For more information on trading options, you might want to see our free course on how to find stocks that have the potential to explode higher in price.)

The type of options contract you choose will be determined by the direction you predict the underlying stock to go in.

You would buy calls if you believe the stock price will increase or puts if you think the price will decrease.

You can purchase both pus & call options in the same transaction.

If you think a stock will remain at a certain level, you can also sell options.

Predict the strike price of an option

An option contract has to be “in the money” for it to have any value.

For this to happen, you have to choose a price level that you think the stock will be above or below.

This is called the strike price.

In the case of calls, the price of the stock must be above the strike price for the contract to be in the money.

For puts, the price of the stock must be below the strike price for the contract to be in the money.

If you sell a call or a put, then for either to be in the money, the above scenarios would be reversed.

The amount you pay for an option contract (referred to as the premium) includes both intrinsic and time value components. If the stock price is higher than the strike, the intrinsic value is the difference between the strike and the share price. A stock’s “time value” is based on its volatility, the expiration date, and interest rates, among other considerations, as well.

Decide on a time range for the options

Options contracts have a designated expiration date that identifies when you can exercise the option. You can’t just choose a date out of thin air in this case.

And when you look at the list of available options (called option chain) you can see all the available time frame options.

Options contracts are classified as either American or European based on when the option can be exercised. American options can exercise at any time before the expiration date, but European options can only exercise on the day of expiration. Due to its greater freedom for the option buyer (and more risk for the option seller), American options often cost more than European options.

Days, weeks, months, and even years are all possible expiration dates. The most experienced options traders avoid trading daily and weekly options because of their high level of risk. Monthly and annual expiry periods are best for long-term investors. Your investment thesis will have more time to play out with longer expiration dates. But this longer expiration period also means that the options will be more expensive to purchase.

Even if the stock falls below the strike price during the contract, so long as there is still time left before the expiration date, the option will still have some value. (Because there is still a certain amount of time left for the trade to fluctuate.)

 

Get Hedge Fund Beating Options Trades Delivered to Your Inbox!

Tired of missing out on the huge gains in the market?

Wishing you knew which trades had the best odds of succeeding?

Would you like to know EXACTLY how & which trades to place WITHOUT having to spend years learning?

Well now you can let our Team of Trading Experts & Exclusive AI Trading Software do the work for you!

Click Here to Start Making Bank With Our Option Trade Alerts!

PS – Our trades have an average win rate around 94% and have returned QUADRUPLE digit yearly returns.

The Double Edge Sword of Leverage : How Is Leverage Calculated in Finance?

The Double Edge Sword of Leverage : How Is Leverage Calculated in Finance?

There once was a young man who wanted to become a millionaire. He didn’t have much money, so he decided to borrow as much as he could from friends and family. He put the money into stocks and bonds and made some good investments. Within a few years, his investment portfolio had grown to over a million dollars.

But then the stock market crashed, and his investments lost almost all their value. He was now in debt up to his eyeballs. He had no choice but to declare bankruptcy and start over from scratch.

This is a cautionary tale about the dangers of leverage. When used wisely, leverage can be a powerful tool for building wealth. But when used recklessly – or if the market changes quickly – it can lead to financial ruin.

how is leverage calcuated in finance

The notion of using borrowed money-mainly from fixed-income instruments like debt and preferred equity or preferred shares of companies-to boost a company’s return on investment (ROI) has several definitions in financial terminology.

Leverage is a well-known financial and economic approach that allows a company to increase its financial assets by leveraging its debt. The leverage of various debt instruments to enhance a company’s return on investment is the most common definition of financial leverage.

Using financial leverage does not guarantee a favorable result. The more debt a firm employs as leverage, the greater – and riskier – its financial leverage situation is in general.

Companies and their stockholders face a greater financial risk when they take on more leveraged debt, which increases the interest rate burden.

Calculation of Financial Leverage

Financial leverage may be calculated using the following formula:

Leverage = Total Debt / Total Equity

Total corporate debt and equity of shareholders is the definition of leverage.

Calculate financial leverage by following these steps:

Determine the total amount of a company’s debt, including both short-term and long-term obligations. Financial indebtedness includes both current and future obligations.

Total shareholder equity (i.e., multiplying the number of outstanding firm shares by the stock price) should be tallied.

Total debt to equity is equal to total debt divided by total shareholder equity.

And this is how a company’s financial leverage ratio may be calculated using this formula.

Get Hedge Fund Beating Options Trades Delivered to Your Inbox!

Tired of missing out on the huge gains in the market?

Wishing you knew which trades had the best odds of succeeding?

Would you like to know EXACTLY how & which trades to place WITHOUT having to spend years learning?

Well now you can let our Team of Trading Experts & Exclusive AI Trading Software do the work for you!

Click Here to Start Making Bank With Our Option Trade Alerts!

PS – Our trades have an average win rate around 94% and have returned QUADRUPLE digit yearly returns.

If a firm has a high leverage ratio — say, three to one or greater — it puts its share price at risk and makes it more difficult to get future funding if the company defaults on its current or previous loan commitments.

Take a look at these two situations to get a better understanding of financial leverage.

A company spends $5 million to acquire a desirable piece of real estate to develop a new manufacturing facility. Five million dollars is the price of the land. This is not a case of financial leverage because the corporation is not utilizing borrowed funds to acquire the land.

Using financial leverage means paying for the same piece of property using a combination of the company’s own funds and borrowed funds totaling $2.5 million.

When a company takes out a $5 million loan to buy a property, it is said to be heavily leveraged.

Anyone who purchases property is familiar with the financial leverage indicators.