Most traders are familiar with short-term leverage trading, but how do you use margin for long-term investing success, and is it even possible
How much credit should you use when investing in stocks with leverage for the long term, which leverage products are available, and what are the leveraged fees involved?
These questions and many more will be answered in this investment tutorial so keep reading if you are looking to increase your profits by x2, x5, or perhaps x10 over the long run.
Leveraged investment strategies have become increasingly popular and the demand for high-quality investment products that offer borrowed money is on the rise with ETFs being the most popular investment vehicle.
Other options such as derivatives products and certificates that are hosted by stock exchanges are viable options for those who want to get a bit more oomph in their returns.
Even though investments with borrowed capital are seen as a riskier endeavor, it’s far less risky than high leverage in trading and it can be quite profitable if you know how to control your risk.
You will learn
What does it mean to be leveraged in long-term investing?
To be leveraged in a long-term investment means that you are using borrowed funds to increase your position size in an attempt to boost returns.
This can be used either by borrowing money from a bank or directly from your 100x leverage crypto exchange if that feature is an option.
When you open positions that are bigger than what your current account balance allows for it means that you are leveraging your long-term investments. This is becoming increasingly popular and with many new products released to retail investors, it’s very easy to get involved.
The main reason why investors choose to increase their buying power is to maximize returns of good investments such as stocks, indices, commodities, and sometimes funds.
Those who succeed by picking the right investments while using up to 1:10 margin in their portfolio can increase returns exponentially throughout a couple of years and will enjoy a much better ROI overall.
However, this does not come without added risks. When you boost your investing schemes with funds you also run the risk of losing money faster than normal and if you fail in your stock picking, you might end up getting liquidated.
When looking at long-term predictability between stocks vs forex vs crypto I think that stock trading and crypto trading are the two easiest markets to predict.
What is a leveraged investment?
An investment is any investment in any asset class where you use borrowed funds to increase your buying power. For example, a stock can be a leveraged investment if you have access to more capital either from a bank loan or through a stock exchange that offers leverage.
Nowadays there are great options for retail investors who are looking to boost earnings with a bigger stake in the market and the most popular long-term investment with margin is ETFs. The reason why ETFs have grown in popularity as a margin-traded product is due to the accessibility and the low cost offered.
Here is a list of the most popular asset classes and investment products that are used in combination with leverage:
- Stocks
- ETF
- Index
- Commodities
- Funds
- Options
- Derivatives
These products all operate slightly differently which makes some of them better suited for investors who have a longer outlook on the market and some of them suit investors who are looking for returns in the medium term. Scroll down on the page to learn more about how these products work.
Should you borrow money to invest in stocks?
Most investors dream of taking their portfolio of a couple of thousand dollars to tens of thousands of dollars in a matter of a year or two. This is a very difficult task unless you have a lot of experience in picking good stocks and evaluating the overall market.
However, if you are an average market speculator and you add leverage to the mix, you can increase your returns handsomely without taking on too much extra risk.
A tip is to track your break-even point with our average cost stock calculator, this way you know how much money you need to borrow to make a profit once the stock turns around.
The decisions on whether you should borrow money to invest in stocks have to be made by each investor but if you are not sure whether it would be a good fit for you or not, I have listed some reasons for and against it.
The table below is simply meant to help you make your decision a little bit easier. Read the list and see which side resembles best your personality.
| Yes | No |
| I have a medium to high-risk tolerance | I don’t want to take on extra risks |
| I am totally fine with losing all my invested money to make better returns | I don’t know how to control a leveraged position in the market |
| I am fine with losing all my invested money to make better returns | I am afraid of getting liquidated |
| I have previous experience in structuring a portfolio | I don’t understand how these products work |
| I am fine with increased fees and commission | I want to pay as few commissions and fees as possible |
Keep in mind that these are simply guidelines and are not a make-it-or-break-it recipe for everyone. Some of you might have very little experience with these products but you have sufficient knowledge from previous stock investing.
Examples of some investment products
Today there are various products to choose from for investors looking to increase their returns with added purchasing power. Depending on your time frame and your risk tolerance you are free to choose among several high-quality products that are offered by many stock exchanges at minimum commissions.
Keep in mind that whenever you add borrowed money into the mix there is an interest to be paid to your broker, much like the same way you pay interest to your bank on a mortgage.
This interest payment is called the overnight fee, or the management fee, and is one way for brokers to make money on leverage.
Below is a list of some of the most popular products for investors. Take your time to learn the differences and perhaps you can find a new product that is suited to your style of investing.
- ETF – A leveraged ETF is an exchange-traded fund that can be found by many stockbrokers and it aims to track an underlying stock, index, or other asset classes. The goal with an ETF is to invest in something of high quality that has had a proven track record of growth and then add borrowed funds to the mix to outperform the underlying asset. The standard ratio for an ETF is between 1:2, 1:3, and 1:5.
- Certificates – Certificates are usually offered by a bank or an online bank and they often track underlying security such as a commodity, a stock, a bond, or a national currency. Certificates tend to have a higher margin ratio than ETFs and can offer borrowed money with a ratio of up to 1:10. This increases the risk factor when compared to other products and only should only be used by investors with high risk tolerance and good experience in picking financial assets and know-how to manage their positions.
- Derivatives – Derivatives are among the riskiest investment products on the market as they offer the highest level of leverage. Investors are only required to add a small initial investment as margin requirement which can be as little as 1-2% of the total position size. This translates into ratios of up to 1:100, something that should not be attempted by a novice investor. In the same way, like many other products, derivatives get their pricing from an underlying security such as a stock, a commodity, a currency, or an index. Many investors leverage trade crypto with derivatives.
- Funds – Some funds are passively investing in other products that have built-in margin. When you invest in a leveraged fund you usually don’t carry the risk of liquidation should the fund perform poorly during a market crash. This is why leveraging up with a fund can be a good strategy if you want to increase your output while maintaining your risk factor low. The cost of buying these funds is usually greater as you have to compensate for the interest payments that the fund is putting out.
- Options – Options are somewhat complex products that offer sometimes high leverage and a fixed risk on each trade. The risk you pay is the premium you put down to open the option contract and the credit is indicated in the contract you buy or sell. Options are great ways to increase returns on profitable trades while keeping your risk at a minimum. I would recommend options to investors who are having trouble managing their risk while the position is open or have problems with picking the right credit ratio. Also, if you don’t feel comfortable with calculating your margin capital you can use margin as a safe way to know how much you will risk on each trade.
To learn more about how investment products work read our guide on why brokers provide leverage.
Also, test our leverage calculator for stocks to see how much margin you need to open your next position.
How to structure your portfolio
How to structure a margin-traded portfolio you may ask? There are different ways to go about this but the main focus should always be longevity and long-term success.
Opting for quick gains in an investment portfolio with increased buying power can be very dangerous and should be avoided. The first thing I would like to point out is that the lower your ratio is, the higher your chance of success.
There is a sweet spot around 1:1.5 to 1:3 which will give you a good boost but still keep your price of full liquidation far away from your buy-in price. Now let’s take a look at how you go about structuring your leveraged portfolio for long-term success.
Step 1
The first step is to decide how much money you can invest in your portfolio. The amount you choose should be an amount that you are comfortable losing if the market suddenly collapses under your feet (which is a possibility). Keep in mind that you can always re-invest in your portfolio monthly or whenever your economic situation improves
Step 2
Depending on your personal risk tolerance and your capital you have different options of markets and products to choose from. Please adhere to our examples above to see which kind of product and asset class would suit you well.
If you already know which asset class you are going to invest in, then the job is much easier. If you are new to investing with leverage, I recommend you spend some time researching each product and asset class to see which one suits you best.
Step 3
Now it’s time to choose a stock exchange or an investment platform where you will structure your portfolio. I would recommend checking with your local exchanges, online banks, or even your bank for trustworthy solutions. You always want to choose a broker with a reputation and is regulated by your local government, anything else is a big no.
Step 4
Now that you have your investment capital ready, you have selected your proper product and asset class, and you have a reputable stock exchange to work with it’s time to balance your portfolio so that you can enjoy long-term gains and still sleep well at night.
A spread of index funds and stocks is a very traditional mix in a long-term leveraged portfolio which will let you follow the overall market up and down but with a little extra boost from the borrowed funds. Below is a table showing you three different ways to structure your portfolio seen from a risk perspective.
| Low risk | Medium risk | High risk |
| 60% Index funds 20% Blue chip stocks 20% Low leveraged ETFs | 20% Index funds 40% Blue chip stocks 20% Medium cap stocks 20% Medium Leveraged ETFs | 50% Medium cap stocks 50% High leveraged ETFs |
How leverage increases your overall returns
Investors often wonder how leverage increases the returns in their investment portfolio and the answer is pretty simple. I will give an example where our friend Joe is investing in stocks without margin, or 1x leverage ratio and his brother Jeff invests with leverage.
Both brothers will invest in the same stock and they will both start with $2000 with the only difference being that Jeff will use a 1:3 ratio in his portfolio. Both brothers will invest in the Tesla stock which will make a 25% gain in one year, let’s see how the different portfolios will react to this increase.
| Joe 1:1 | Jeff 1:3 | |
| $2000 + 25% gain | +$500 | +$1500 |
During this year of investing in Tesla, Joe made a profit of +$500 while Jeff made a profit of +$1500. But how does this work how is this calculated? See our calculation below to understand exactly how leverage boosts your investment profits.
| Joe: $2000 + 25% gain $2000 + 0.25% = $500 | Jeff: $2000 x 3 = $6000 $6000 + 25% gain $6000 x 0.25% = $1500 |
The simple explanation is that Jeff made 3 times his money due to the 1:3 leverage ratio he used.
What are the risks?
- Larger losses/drawdowns – It is true that when you invest with increased capital you might suffer from larger losses or larger drawdowns or a bear market while the market is falling or is just being negatively surprised during the short-term. This is something that you should be aware of and in the same way that Jeff made 3 times his money during a year, you might lose a third of your money very fast. See our guide on “how does leverage affect losses in trading?” to learn more.
- Higher fees – If you are a medium-term investor and like to buy and sell after just a couple of weeks of holding time you are going to pay higher fees only for buying and selling. Another fee you need to pay attention to is the overnight fee or the management fee that many brokers charge for the use of borrowed funds.
- Liquidation – The most immediate risk to investing with credit is the fact that you can get liquidated. This happens when you have poor leverage risk management and your losses get out of control. A liquidated portfolio loses all funds and is left out at a shameful 0. You should do everything in your power to avoid this, including the use of a stop-loss.
- Shady trading platforms – When you deal with leverage, some platforms might try to scam you off your money so always make sure that you are investing your money on a platform that is trustworthy, regulated, and preferably local in your country.
- Margin call – A margin call is a warning signal from your broker that you are running out of funds due to your losses. This is something that can only happen when you invest with leverage.
Benefits and drawbacks
| Pros | Cons |
| Greatly increased profits | Risk of large losses |
| Good for smaller accounts | Can be very stressful during drawdowns |
| Shows profits faster | Risk of total liquidation |
| Safer than short-term leverage trading | Higher fees (buy/sell + management) |
| Very rewarding during a bull market | Many brokers are misleading |
What other investors ask
Yes, it can be a great addition to your long-term portfolio as long as you keep your margin ratios low.
The best leverage ratio for investing long-term is between 1:1.5 and 1:3. Read our guide on how to select leverage for $50 for more info.
Yes, if you make accurate predictions of your investments leverage will increase the profit in the long run.
If you can handle the added pressure of bigger drawdowns during market downturns it’s worth considering adding buying power to your investment portfolio.
When you invest in a 3x leveraged stock you increase your buying power by 3 times. For example, if your capital is $1000 and you invest in a 3x leveraged stock your new buying power will be $3000.
Your investments lose money faster when you add margin to the mix. Always keep an eye out for the margin capital in your investment account to avoid liquidation.
