Financial Analysts Journal 01 Jan 1945 Volume 1 Issue 1
Appraising the Risk Factor in Investment Company Leverage Shares
The risks of buying volatile issues (generally of low-priced stock) in a rising market can be reduced without sacrificing the potential for profit by buying the junior securities of companies with debt or preferred stock outstanding. The stocks of such “leverage” investment companies have advantages over ordinary low-priced issues because the risk of the company going bankrupt is low and because the stock will rise faster than the market will. The mechanics of leverage are the same as those of a margin account except that the investment company shareholder is not wiped out by a large loss (but has a permanent call on future recovery) and the leverage is automatically reduced as the market rises. Various leverage investment company stocks are suitable for different types of investors, but before being chosen for investment, the companies must be carefully analyzed, particularly as to the proper discount or premium of the prices.