Stock Leverage
Leverage is how to take your successful strategy to the next level and accelerate profitability.
Great Point Capital has one of the best balance sheets in the daytrading space, with over $30 million in capital dedicated to providing leverage for traders.
What is Stock Leverage?
Stock leverage is using borrowed money to trade larger quantities than your base equity would normally allow. For instance, if you have $30,000 in your account, you could buy 1000 shares of a $30 stock. If your stock leverage is 4:1, you could buy up to $120,000, or 4000 shares. Leverage of 10:1 would allow for a 10,000 share position. Applied to profits, this becomes more dramatic – if you buy the stock at $30 and it goes to $30.50, you make $500 in the first instance, $2000 in the second, and $5000 at 10:1. In this last instance, you have made 16.67% on your base equity, all from just a 1.67% move in the stock.
Of course, the problem comes when you have a losing trade. Stock leverage magnifies your losses just as it does your gains. The same move the other way creates a $5000 loss and leaves you with only $25,000 in your account. When employing leverage it becomes extremely important to keep risk limits in check. Once your account is at $25,000, it will take a gain of 20% just to get back to your original $30,000.
Should I be Looking for Stock Leverage?
From the example above, you can see that stock leverage should only be used by disciplined traders with defined risk limits and stable strategies. If you are a volatile trader, leverage causes problems longer-term because it takes higher percentage gains to make up for losses – in the above example, a 16.67% loss will require a 20% gain to get back to even.
If you are looking to employ stock leverage, these are your options:
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The SEC fixes max leverage at 4:1 intraday and 2:1 overnight for account balances over $25,000. Inexperienced traders should remain at this level until developing the strategies, discipline and risk tolerance for higher leverage. For accounts with balances over $500,000, Portfolio Margin accounts can boost leverage to 6:1.
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Joining a proprietary trading firm can get you leverage of 20:1 up to 50:1, depending on your strategy and track record. This is the ideal spot for traders who have developed their strategies and have the discipline to manage losses. You can scale your strategies using the firm’s capital, and greatly increase your earning potential, even after the firm takes its cut. For example, if you are trading a $50,000 account and making $20,000/year, contributing the $50,000 to a prop firm can get you leverage of $1 million, rather than the $200,000 you can achieve in a customer account. Scaling your profits accordingly, you can earn $100,000/year. Even after the firm takes it’s 10-20% cut, you are still earning 4-5x what you did on your own.
Using leverage is up to each individual, weighing their discipline and strategy with preferences for risk and how much of their own capital to tie up in their trading career. Our experienced account team can walk you through all your options, from customer to prop to hedge fund.