Using Money, Options, and Time in Your Favor
First to understand leveraged silver investing, it’s vital to know what leverage is, how it works, and the different types of leverage an investor can use. Leverage as Princton defines, “money as a way to amplify potential gains.” Now most of this leverage will be borrowed money, but there are other types of levearage such as futures contracts, options, and time. We’ll talk about each of these below.
Generally speaking for individual investors, borrowed money for investments in silver will come in the form of margin. Margins are set up as loans against stocks traded on major exchanges. The interest rate on margin accounts will range from 8% to 11% depending on your personal income, investment experience, and amount of leverage you use. Words of warning, a stock can move both ways, margin won’t. While you will benefit from a stock on margin moving up, you will still pay margin for a stock moving against you.
Second, if you could find a silver mining stock that would pay a high enough dividend yield to pay the margin payments, then technically you’d own the stock with borrowed money. But again, leverage is great for stocks moving in your favor, but can burn when going against you. It takes an incredible amount of financial knowledge and experience to profit from leverage.
Options are an amazing form of leverage. Options work as leverage because of the difference between the price of the underlying asset and the cost of the option to buy the underlying asset. For example, say you wanted to invest in Silver Wheaton Corp. (SLW). In this example you have $1,000 to invest. You can either buy shares around 62 shares, or you can buy options. For Silver Wheaton, you could buy options for 7,200 shares using the same $1,000. Be sure to read all the risks before using options. Options work the same way as debt, it’s incredible when moving with you, and burns when it turns against you.
Futures are similar to both options and margin. As Investopedia explains, “In the futures market, leverage refers to having control over large cash amounts of commodities with comparatively small levels of capital.” That’s similar to the options because of the amount of silver you could control, but also similar to a margin because you might eventually have to pay the total sum of the futures contract you hold.
Time-Value leverage remains unique to the silver investing market because of the collection premium most coins collect over the years. In this example, the investor holds 20 coins from a later date, say 2004. The difference in markup between the current year and the year this investor holds is: $1.00 or more. Since, this investor remains interested in silver as an inflation hedge, she doesn’t have a preference about the year of her holdings. She would then sell the older coins, and buy the current year. Now, because of the time-value collectors have placed on the later year, with the extra premium she can now buy a whole new silver eagle.
This collector premuim works to the silver investor’s favor because he or she can continue to build her silver portfolio buy selling older coins and buying the current year. It’s true compounding for the silver investor.