As a small investor, there is a number of advantages to buying leverage derivatives instead of the actual stock:
Once the KO barrier is hit, your money is gone - and you do not continue to lose as you would with actual stock. For instance, imagine the XY stock traded at 100€. You intend to trade it and set a stop-loss at 90€.
Case 1: You bought the stock.
It drops to 90€, stop-loss fires and you're selling at 88€. 12% lost. Or, it drops to 50€ over night - your stop loss is sad history now. In both cases, add trade fee for selling.
You intended to risk 10%, so you buy a leverage product using
1 / (1 - 90%), equaling the 10% stop-loss of the money you intended to use.
The stock drops to 90€. You lost 10€, which is better than the 12€ (+fee) we had earlier. Or, it drops to 50€ - you also only lost 10€, which is a vast improvement.
Also, we cannot get in the psychological trap of lowering our intended limit "because I'm sure it'll go up again really soon!".
Ok, so if the stock drops, the leverage product is advantageous.
What if the stock actually rises?
In that case, we gain exactly the same. For instance, let's assume the value rises to 120€.
In case 1 (actual stock), we get 120€ from 100€, i.e. +20€ which equals +20%.
In case 2 (leverage/KO), we get 30€ from 10€, i.e. +20€ which equals +200%.
In both cases, fee applies, though the derivative might possibly have a slight edge because it's lower volume.
So if we win, we win the same, and if we lose, we lose less. Clear case, isn't it? If it were the clear, why doesn't everyone follow this idea? Did I miss something?
I can think of two cases where the actual stock might be preferred:
- You want to make use of the rights associated with the stock (for instance, enjoy dinner at their annual stockholder meeting). This might be important in some cases, but generally, I don't think this is very important.
- You aim at the dividend paid. This is a special case. In case of stock that do not pay dividend, it does not apply obviously.
Apart from that, I can only see small amounts of money lost due to the additional cost of derivatives in general.