Charted: How Leverage Multiplies Stock Returns
Visual Capitalist
Published
1 hour ago
on
June 25, 2024 Graphics & Design
Swipe between images to see how leverage works for both long and short ETFs.
Have you ever wondered how to increase your stock exposure? Beyond simply investing a higher amount, using leverage is an opportunity to multiply your returns.
This graphic, from GraniteShares, shows hypothetical examples of how leveraged ETFs can affect your returns compared to regular stock trades.
How Does Leverage Work?
If you have a strong belief that a company’s stock price will go up or down, single-stock leveraged ETFs can help you increase your short-term exposure. The ETFs aim to multiply a stock’s daily price changes by a certain percentage before fees and expenses.
Long ETFs
Single-stock long ETFs are useful if you think the stock will gain value. Here’s a hypothetical example of how a $100 trade might perform over a single day for two scenarios:
The stock experienced a 5% gain The stock experienced a 5% loss
We’ve compared a regular stock trade to a 2x long ETF, which aims to multiply a stock’s daily price changes by 200% in the same direction as the stock’s movement.
Stock Daily Price MovementEnding Value of Initial $100 Stock Trade2x Long ETF Daily Price MovementEnding Value of Initial $100 2x Long ETF Trade +5%$105+10%$110 -5%$95-10%$90
When the stock gains 5%, the leverage of the 2x long ETF aims to double that gain for a daily return of 10%. On the flip side, if the stock goes down by 5%, the 2x long ETF could create a 10% loss for the investor.
Advertisement Short ETFs
If you think a stock will lose value, single-stock short ETFs can be useful. Here’s a hypothetical example of how a $100 trade might perform over a single day for the same two scenarios.
We’ve compared a regular stock trade to a 2x short ETF, which aims to multiply a stock’s daily price changes by 200% in the opposite direction from the stock’s movement.
Stock Daily Price MovementEnding Value of Initial $100 Stock
The full article is available here. This article was published at Visual Capitalist.
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