Ask Colin

Is it not possible to increase returns by margin lending and further spicing them by using derivatives?

You are absolutely correct that it is possible to increase returns by borrowing in the form of margin lending or derivatives (trading on margin - it is the same thing). It is also possible to have double leverage - trade derivatives with marging lending funds.

The problem is simply the financial risk. You will now be geared at three levels - the company itself is geared, you have geared your equity and then on top of that you have geared your borrowings.

The thing about gearing is that it magnifies your returns, but it also magnifies your losses. It really comes down to how much risk you are prepared to take. As an insolvency practitioner, you would be aware of this issue and how often high leverage brings people undone.

Keywords: