If you want quick investment returns, there is no faster way to earn money than through leveraged financial instruments. Leverage is a way to control a large amount of assets for a small amount of money. There are many ways to leverage your investments, but there are three basic ways that are most commonly used: stock options, futures and leveraged exchange-traded funds (ETFs).
Risk and Reward
There is an important principle to remember when it comes to investing your money: the higher the potential reward an investment offers, the higher its risk. Using leveraged securities entails a high degree of risk. While you can potentially make a large amount of money very quickly, you can also lose more than your original investment with certain leveraged products, so it is important to use leverage carefully.
Stock options are contracts between a buyer and a seller that gives the buyer the right, but not the obligation, to buy or sell a stock at a specific price at a specific day in the future. A single contract controls 100 shares of stock. The price options contracts are sold for is called a premium, and the premium price can be very sensitive to price moves of the stock it is written on. For example, if the stock price moves 2 percent, the premium price of a contract you own can potentially move 20 percent or more, depending on many complex factors. If you can sell your contract to someone else for a higher price than you paid, you keep the difference as your profit.
Futures contracts are similar to options contracts. Futures contracts are typically written on commodities, such as gold and silver, but they can also be used for stock indexes, such as the S&P 500. A futures contract is an agreement between a buyer and a seller obligating the buyer to accept delivery of a commodity or all shares in a stock index at a specific price at a specific date in the future. For example, a gold futures contract controls 100 oz. of gold. The cost of a single futures contract is much less than it would cost you to buy 100 oz. of gold, so you can control a large investment for a fraction of the cost if you bought it outright. Like options, if the price of gold makes a small percentage move, the price of the contract will make a large percentage price move in response.
Leveraged ETFs are probably the least complicated way to use investment leverage. An ETF is a financial instrument designed to trade at the same rate as the index that it mirrors. For example, the ETF DIA moves up and down at the same percentage as the Dow Industrial Average. Some ETFs are leveraged, meaning they are designed to move at a faster pace than their underlying indexes. BGU is an ETF that moves up and down three times faster than the Dow. Thus, if you buy BGU and the Dow moves up 1 percent, BGU will move up 3 percent.