Strategy: Leverage—tool of the rich.
I talk about the Wealth Wheel: Education, Cash Flow, Growth, Big Hits, Leverage, Taxes and Asset Protection. A key element to the Wealth Wheel is Leverage. The ability to take something small (capital, opportunity, energy or intellect) and leverage the item, into a huge result.
Leverage is an important element to wealth, and even success. Taking limited resources and using them to capacity. Whether in business, real estate, the stock market or life, this is a philosophy and strategy you should master. Let me give you some real life examples, of how to apply this tool to various areas in building wealth.
Strategy: Stock Market Leverage
Options can be great leverage in the stock market. If you know, what you are doing. Otherwise they can just be a waste of money. Ensure you get a strong education on options, before investing.
If the price of XYZ stock is $ 50 a share, we might be able to buy the option for $ 5 a share. Options are usually sold a “contract” which represents 100 share of stock. We buy a 100 share at a time (1 contract). Obviously, I can buy a lot more for $ 5 bucks vs. $ 50 dollars per share. Therefore, return on investment is larger (leverage). Plus I can start with a small investment.
Now many new option investors will buy options that expire in less than 30 days. What they do not realize is the value of the option will decay fast. In fact the greatest decay (loss of value), is in the last 30 days. What that means, is if you are buying options they should be 60 to 90 days minimum. So, we see changes in value based on the market place, not the decay.
A Margin Account is a type of Leverage. You put 100k in an Margin Account. And now they let you trade 200k of stock . 2:1 leverage
Options have 8:1 leverage
Futures have 25:1 leverage
For Ex 50:1 leverage.
There are other examples of leverage in the stock market such as: credit spreads, naked position, and margin (loans).