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Don't Fear the Meltdown: Crowdstrike's Resilience Offers Leverage
Understanding Leverage in Investing
Today’s episode - Leverage
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In investing, leveraging involves using borrowed capital to amplify potential returns. This strategy can magnify gains but also carries inherent risks. Today, we're exploring leveraging in a different context—using the power of cybersecurity to protect and grow your investments.
In an increasingly digital world, where cyber threats loom large, companies like Crowdstrike are at the forefront of safeguarding businesses and individuals from malicious attacks. Crowdstrike helps organizations mitigate risks and maintain operational continuity by providing cutting-edge endpoint security solutions.
In this update, we'll delve into Crowdstrike's recent performance, its position in the cybersecurity landscape, and why we believe it represents a compelling investment opportunity. We'll also discuss how leveraging Crowdstrike's technology can be seen as a strategic move to protect and potentially enhance your investment portfolio in the face of evolving cyber threats.
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Why am I buying Crowdstrike ($CRWD)?
The Relative Strength (RS) Rating for Crowdstrike Holdings (CRWD) stock recently climbed from 63 to 73, indicating improving technical performance compared to other publicly traded companies. While not yet in the ideal buy zone, this upward trend suggests that CRWD could be gearing up for a potential breakout.
The cybersecurity firm's latest quarterly report showed impressive growth, with earnings up 63% and sales up 33%. Investors are eagerly awaiting the next earnings report, expected around August 28th.
Despite the recent market volatility, CrowdStrike remains a strong player in the cybersecurity industry, ranking No. 9 among its peers. The company's innovative solutions and robust growth potential make it an attractive long-term investment.
As of August 22nd, we had a 140.50% gain on our CRWD position, which we initially purchased at $239.17. We remain bullish on Crowdstrike's future.
Next week, we'll explore why we remain bullish on Crowdstrike even after the recent market dip. We'll share a full update and analysis and a companion YouTube video. Don't miss it!
Are you buying, holding, or selling (sold) CRWD stock? Share your thoughts in the comments below!
Now, you might wonder how we can get such a massive gain of 140.48%.
Let's delve into understanding the potential benefits and dangers of using leverage. ⤵️
Understanding Leverage in Investing
Disclaimer: Leverage is risky and requires a thorough understanding. Investing carries the risk of loss. This newsletter was created for educational and entertainment purposes only. Consult your financial adviser before making any investment decisions.
There are apparent differences between a novice investor and a seasoned one. While grasping the fundamentals of trading and investing is essential, exploring advanced features like "leverage" and "margin" can significantly elevate your trading game.
These terms might initially sound complex, but they can positively impact your investments once understood. Let's delve into leverage trading, understand margin usage, and examine real-world leverage examples.
Today, let's focus on leverage.
Leverage: Amplifying Risk and Return
Leverage and margin trading can be attractive options for those aiming to enhance the risk-return ratio of their investments. Both concepts involve establishing a substantial trading position with less initial capital than required. If your decisions are sound, profits will be multiplied compared to buying outright. Conversely, incorrect calls will magnify losses.
Tip: Leverage trading can push you beyond your comfort zone. Studies on trading psychology highlight that cognitive biases influence how people perceive profits and losses, affecting their decision-making.
How Does Leveraged Trading Work?
Leveraged trading empowers you to increase your trade commitment by borrowing from your broker. The leverage amount is determined when executing the trade. You can configure your account for default leverage levels or choose a broker offering trade-by-trade leverage adjustments.
For profitable trades, the process remains similar, with or without leverage. Profits are credited to your cash balance upon closing the position.
However, loss-making trades introduce additional factors. Brokers aim to prevent you from holding positions that might incur losses exceeding your deposited margin.
Leverage in Trading: Illustrated Examples
Let's solidify the concept with examples. Imagine you're confident about Google's share price rising. You have $100 to trade but seek higher potential returns.
With a 1:5 leverage from your broker, you could manage a position up to $500, using $100 as a margin. If Google's share price doubles, your position would be worth $1,000 instead of $200. However, a 10% price drop would result in a $50 loss instead of $10.
If the maximum leverage offered was 1:10, a $100 cash deposit could allow exposure of $1,000.
Here's another scenario. If you had $1,000 and wanted to trade Apple stock using leverage, the table below illustrates potential position sizes based on leverage rates:
Available Funds | Leverage | Position Size | Price Change | New Position Size | Funds After Price Change |
$1,000 | 1:2 | $2,000 | 10% | $2,200 | $1,200 |
$1,000 | 1:2 | $2,000 | -10% | $1,800 | $800 |
$1,000 | 1:5 | $5,000 | 10% | $5,500 | $1,500 |
$1,000 | 1:5 | $5,000 | -10% | $4,500 | $500 |
$1,000 | 1:10 | $10,000 | 10% | $11,000 | $2,000 |
$1,000 | 1:10 | $10,000 | -10% | $9,000 | $0 |
Since you're effectively borrowing, overnight financing fees (daily interest charges) apply. More prominent positions incur higher fees.
Final Thoughts
Leverage doesn't improve your decision-making. If your trading style remains the same, your win-loss ratio will likely stay consistent. The key difference is magnified profits and losses, although losses are capped at your investment. Leverage trading demands careful planning and carries high risk-reward potential, making it unsuitable for all trading styles.
Better yet, learn to understand the advantages of spending more time in the market. Check out this episode: "Time in the Market" or "Market Timing."
Remember, investing is a journey, not a sprint. While August and September may present challenges, they're also rife with opportunities for those willing to do their homework. Keep your eyes on the horizon, stay informed, and never stop learning.
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The US stock markets experienced a sell-off as investors tempered their expectations ahead of Federal Reserve (Fed) Chair Jerome Powell’s upcoming speech at Jackson Hole.
Get the full update from this episode - Expectations for Jerome Powell’s Speech at Jackson Hole
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