I am trying to get my head round the risk in using leveraged instruments like 5SPY on the platform.
My question is very hypothetical and 5SPY is probably a bad example as it is very unlikely to fall to zero, but lets say my account had £1000 capital deposited and I bought 50 shares in a leveraged instrument at £1 per share and it fell to zero. By the nature of the product you should then be have lost more than you originally invested.
How would trading 212 handle this ? would they take additional money from my deposited capital to cover the deficit? I know that on trading 212 you cannot lose more than you deposit and they will step in if losses exceed your capital, But what happens on an investment level with leveraged instruments if the draw down becomes more than the initial investment and your account still has some capital to cover some of the deficit?
Your best looking at source - it’s a share, if it goes to zero, it’s worthless. You don’t lose more than you put in.
You typically pay a fee for them to create the product for you, and the cost to borrow £5 for every £1 you invest. They typically close out daily so you don’t see out of hour movements when they do.
If SPY dropped 20%, then on a 5x leverage your shares become worthless and closed out.
As a side note, I don’t remember if it is the products of Leverage Shares or Granite Shares (one of the two, see the product’s prospectus), they have a built-in trigger to avoid liquidation.
If the underlying index drops enough to result in -50% on the leveraged product within an hour, then the product gets rebalanced (as if it were end of day). This will seriously impact future returns of course, but allow for more leg room in days of heavy drop.
As an example, a 5x leverage would normally be liquidated on -20% in a day, but with the rebalance breaker, it would trigger at -10%, and then allow a further -20% after the rebalancing (allowing -28% during the day before liquidation).
Some of the products have also a baked-in redemption amount, I remember one liquidated a few years ago with a redemption of 0.10€ per share.