How does short selling affect the leverage of a portfolio?
How does short selling affect the leverage of a portfolio?
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Jack · External communityPost link
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Author: Jack
Original post: https://quant.stackexchange.com/questions/37826
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I know that if you short a stock you borrow it from a broker, immediately sell it, and then buy it back at (hopefully) a lower price.
But I don't understand how it impacts the leverage of a portfolio. E.g.,
Suppose you have a \$100 initial capital, and ABC is trading at \$10 per share. If you decide to short 5 ABC shares, what would the leverage of your new portfolio be?
I would be grateful for any help/ explanations.
Thanks
Jack
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Mustard Tiger · External communityPost link
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Author: Mustard Tiger
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Leverage depends on the security you are shorting and what your brokerage will offer. Typically for retail investors leverage will be lower (2-4x). For institutional clients a brokerage can offer significantly higher leverage. Also it will depend on the security, generally speaking leverage is higher on low volatility assets which are highly liquid. Meanwhile leverage offered by a brokerage will be lower if the asset is highly iliquid and volatile.
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AlRacoon · External communityPost link
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Author: AlRacoon
Original post: https://quant.stackexchange.com/a/37828
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One way of looking at it is how much stock is in your control.
The calculation that I have seen most frequently in Long-Short portfolios for the leverage calculation is (Longs + Shorts)/Equity.
In your example, assuming the $100 is invested in a long position:
($100 Long + $$50 Short) / $100 = 1.5 or 150%
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Quoted from Forex.com.bd-Editorial External question — Quantitative Finance Stack Exchange Author: Jack Source score (net votes, not local likes): 0 Original post: https://quant.stackexchange.com/questions/37826 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I know that if you short a stock you borrow it from a broker, immediately sell it, and then buy it back at (hopefully) a lower price. But I don't understand how it impacts the leverage of a portfolio. E.g., Suppose you have a \$100 initial capital, and ABC is trading at \$10 per share. If you decide to short 5 ABC shares, what would the leverage of your new portfolio be? I would be grateful for any help/ explanations. Thanks Jack
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