What is leveraging? Plainly put, it is the act of taking the unused value of property and converting that value (or to use a bankers word, unused collateral) into buying or getting something additional property without paying cash.

When you leverage your home or rental property, the bank makes a mortgage to you based upon a percentage of the value that an independent appraiser feels the property is worth on the open market at that time. These three little words are key to remember.

Carry this concept over to the stock market, and it is exactly the same thing.

Thus, market value is the price at which a buyer is willing to pay and the seller is willing to sell and will determine the price of the item at that time. Remember that market values in the stock markets of the world change at the speed of light, almost.

Leveraging your investments: If your financial advisor asks you if you want to open a Margin Account, you are entering the world of investment leveraging. A margin account allows you to purchase additional stock without paying additional money, otherwise known as buying on margin or a Type II account.

It works like this. Using the value of the stocks you just purchased, the broker-dealer contracts to loan you money to buy additional stocks. You can also leverage stocks you already own to buy more stocks, but when you do, in both cases, your stocks become the property (collateral) of the broker-dealer until your margin account is paid off.

The broker-dealer makes a profit by charging you interest for the loan of the margin money (around 8.5 percent to 10.5 percent annually). Plus, the broker-dealer has the right under this contract to loan out all of your stock on the street to other customers or broker-dealers who are playing other margin and short shorts strategies. (Selling Short, another subject for later, in Moneywise).

Now investing becomes more complicated that just picking a stock and buying it, as we shall see below! Marked to the market: Your margin account and the stocks in it are valued (marked-to-the market) at the end of every trading day. If the value of the stocks at that time, each day, drop below the amount you are allowed to margin (generally 50 percent), you face an immediate margin call by your broker. If you cannot pay the additional cash to clear the loan (remember you borrowed money to buy this additional stock), your stock holdings will be sold to meet the margin call.

You lose.

If the current market value of the stocks you bought and paid for, plus the stocks you bought on margin, increases by more than the amount you borrowed, you can sell some of the stock, pay off the margin and still have a profit.

How it works: You buy 100 shares of stock at $20 per share. Total cost: $2,000 You margin another 100 shares at $20 per share.

Total debt: $2,000 You now own 200 shares worth $4,000 and owe the broker dealer $2,000 plus margin interest.

A. Stock price rises steadily to $40 per share in one month! Your 200 shares are now worth $8,000, but you only put up cash of $2,000 plus the interest charge of 8.5 percent on $2,000 for one month ($14.17) You sell and pay off the margin account and interest.

Total Profit: $3985.83 B. Stock prices drop in one month and a day to $5 a share Example A was such a good thing, you decided not to sell after one month, and held on; now your 200 shares are marked to the market at $5 (remember, I said they are valued every day) and are now worth $1,000.

You have lost one-half of your original investment of $2,000. You owe the broker-dealer $2,014.17 in your margin call; you don't have the money, so he will sell all your stock for $5 per share, and you will still owe him/her in cash, $1,014.17.

Total loss: $3,014.17 1929 Wall Street Stock Market Crash: The sole greatest cause of this disaster was the use of customer margin accounts that loaned 90 percent of market value. The investor only had to pay ten percent in cash or stocks in order to leverage. When market values plummeted almost overnight, the entire investment world collapsed like a house of cards.

Leveraging real estate: Another strategy is to leverage the excess value in your home or rental property to invest in the stock market. Say you borrow an additional $50,000 or $100,000 on the current excess value in your home by using a home equity line or other mortgage financing. The end result is higher mortgage payments at around 8.5 percent to nine percent and an additional principal debt obligation. Don't forget the additional closing costs in arranging this financing. You now decide to invest the new money borrowed (say $50,000) into the stock market.

What do you need for a real rate of return? You will need to achieve a rate of return over time considerably greater than 9 percent in order to recoup the cost of your new mortgage financing. What happens if you also elect to open a customer margin account with this money? You must also factor in the cost of the margin interest (8.5 percent to 10.5 percent). What do you need to achieve as a rate of return now, just to break even? What happens if the stock you leverage increases in value? You are a very happy person! See example A.

What happens if the stock decreases in value, such as in example B? You will have lost your stock, your savings, and may still owe additional money to meet the margin call. Every month thereafter, you will be making higher mortgage payments.

As you can see, this stock market strategy can increase your "upside'' potential, and greatly accelerate your "downside'' losses. Past performance in any stock does not guarantee future results. Become informed, make wise decisions, invest in what you know and who you know and trust. Take charge of your financial health.

Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or any other investments. Readers needing specific assistance should seek professional advice from their financial advisor.

Martha Myron CPA CA is a Bermudian, a Senior Financial Advisor (Series 7 NASD) with First Bermuda Securities Ltd. and a United States federally authorised tax practitioner. Questions regarding this article may be sent to her at 295-1330 X 241 or Email: mmyron yfbs.bm