Example
An investor with a weighted “Security Portfolio“ value of €100.000, may be eligible for a margin facility of up to €66.666. If all available credit is used to purchase securities eligible to be included in the “Security Portfolio”, then the latter will have a total value of €166.000. The investor ends up with a portfolio with a value much higher than when using only his own money. This leads to leveraged returns (positive or negative).
In the table below, one can see the effect of leverage on returns when using a margin account that can lead to amplified profits (when prices go up) or higher losses (when prices fall).
Table 2 – The operation of Leverage through Margin Trading and its effect on the “Security Portfolio”
|
Initial Value of “Security Portfolio” in Euro
|
Margin Facility Provided by CISCO |
Hypothetical Change in Prices in “Security Portfolio” |
Profit or Loss on Initial Weighted Value of €100k of “Security Portfolio” |
Percentage Profit or Loss on Initial Weighted Value of €100k of “Security Portfolio” |
|
200.000
|
66.666 |
20% |
33.334 |
33.33% |
|
183.332
|
66.666 |
10% |
16.666 |
16.66% |
|
166.666
|
66.666 |
0% |
0 |
0 |
|
150.000
|
66.666 |
-10% |
-16.666 |
-16.66% |
|
133.333
|
66.666 |
-20% |
-33.333 |
-33.33% |
The above is an example and the range of gains / losses has been kept within ± 20% for illustration purposes only. Gains / Losses can be greater in real life.