What is leverage and why is it important?
Leverage refers to the amount of capital or “margin” one must put up relative to the value of the underlying contract. The smaller the percentage, the more highly leveraged a contract is said to be. In the securities markets, the margin required to sell short is typically 50% of the investment’s value, plus interest on the credit (the other 50%) extended to the customer by the brokerage firm. In the futures markets, in contrast, margin is a good faith deposit usually representing only a small percentage of the value of the underlying asset. It’s important to note that the more highly leveraged an investment is, the smaller the fluctuation in price that is required to effect a profit or loss and, therefore, the greater the risk involved in making the investment. Thus, it’s important to closely monitor futures positions. How do Single Stock Futures contracts compare to equity options contracts? Both products are derivatives based on shares of individual stocks, but the costs, benefits, r
