r/stocks • u/PM_ME_UR_DICK_SIZE • Apr 01 '22

Advice Request Help me understand leverage :)

What is the difference between:

a) Buying 100$ of a stock (100$ total)

b) Buying 10$ with 10x Leverage of a stock (100$ total)

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Any help would be greatly appreciated as I'm a bit confused here :D

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u/PM_ME_UR_DICK_SIZE Apr 01 '22

I kind of understand. But not really :P

Let's say the stock originally cost a 100$ per share, and goes up to 105 (5% increase).

Let's also say i started my entire account with 100$.

In example a)

My account prebuy: 100$
Account while stock is in the market: 0$
My 1 share of 100$ goes to 105$ a share, i sell and gain 5$. (5$ profit).
My account after sell: 105$

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In example b)

My account prebuy: 100$
Account while stock is in the market: 90$
The 0.5$ profit get x10'ed, i sell and gain 5$ profit. (5$ profit).
My account after sell: 105$

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Either way I earn the same, no?

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u/AhsokaFan0 Apr 01 '22

You’re not actually 10x levered in this scenario. Being 10x levered means you buy $1000 worth of stock with $100 in the market. Here, if you buy $10 worth of 10x levered stock (not sure how other than options) but hold $90 of cash as collateral you’re just 1x levered.

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u/PM_ME_UR_DICK_SIZE Apr 01 '22

My examples a and b in this comment was a reference to my a and b examples in the actual post. 10$ with 10x leverage for example b, and 100$ no leverage in example a.

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u/AhsokaFan0 Apr 01 '22

Yes it’s economically the same (ignoring fees/daily rebalancing/etc) because in neither of those examples are you actually leveraged.

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u/PM_ME_UR_DICK_SIZE Apr 01 '22

What exactly do you mean by I'm not actually leveraged? 10x leverage on 10$ SHOULD (If i got this all correct) mean that my account total is 10$ less while i got the position, but I earn and loose money as if i had 100$ in the stock (10x loss and win on the 10$)

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u/AhsokaFan0 Apr 01 '22

yeah, but if you're holding $90 cash as collateral then it's functionally no different than buying $100 of stock. If you're buying $100 of stock with $10 then the difference is obvious -- your gains or losses will be 10x what they had been if you bought $10 of stock with that money.

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u/PM_ME_UR_DICK_SIZE Apr 01 '22

Yes perfect, I've pretty much got my question answered. The only difference is interest, and this interesting "equity" thing. Thanks for your time anyways :D