Trading online and I often see instruments that say “Leverage Shares 3x”
What does this mean ? How do they differ from regular shares?
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In the simplest terms, leverage means to borrow something. This could either be borrowing shares (as in short trading) or borrowing money to buy shares (margin trading).
In the context of ETFs, mutual funds, and the like, you’ll see the “Leverage Shares 3x” which means they use leverage to amplify the gains, and losses, of the underlying shares. So, if you buy a fund that is levered 3x, it should gain or lose at 3 times the rate that the underlying items do. So, a S&P500 Leveraged 3x would gain $3 if the S&P500 gains $1, but would also lose $3 if the S&P500 loses $1. Depending on the exact implementation of the fund, it will vary off that ideal ratio by some amount.
This is useful as you effectively get the benefit of investing a larger amount without all of the risk. So, you could invest $100, and thus only risk $100, while getting the same gains as if you had invested $300. On the negative, you may lose all $100 if the underlying items lose only 1/3 of their value.
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