Leveraging - good or bad?

Some definitions on leveraging found on google are shown as follows:-

1. use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable:
2. Use (something) to maximum advantage

In finance, leverage (sometimes referred to as gearing in the United Kingdom and Australia) is any technique involving the use of borrowed funds in the purchase of an asset, with the expectation that the after tax income from the asset and asset price appreciation will exceed the borrowing cost.

The use of leverage is an investment option to further enhance the return on investments by using borrowed money. Leverage must be used with extra caution. Leverage can allows investors to increase the buying power of their investment capital. The ability to buy a larger amount of an investment multiplies the return on the invested capital. The benefits of leverage turn into large losses if the investor makes poor investment choices – it is a double edge sword.

What leveraging can we have in stock investment?

1. Share Margin Financing (SMF) is a type of revolving credit facility provided to investors to finance their share trading and investment activities. Investors can buy shares on borrowed money that is secured by collateral. Acceptable forms of collateral include cash, warrants of certain shares, unit trusts, fixed deposits and quoted securities on Bursa. For example, a stock is purchased in a margin account using the 50 percent leverage offered by stock brokers. An investor pays Rm100,000 to buy Rm200,000 worth of stock, borrowing the balance from the broker. If the stock increases 10 percent to $220,000, the investor earns Rm20,000 gross  or 20 percent (before deducting the interest on Rm100,000 borrowed) on the Rm100,000 initial capital.
   I personally has not done this as I am really kiasi and I can’t sleep if the market is down. Worst if I need to top up to avoid margin call, I don’t think I can take it. Some may argue that if we can borrow with interest at <5% and invest in REITs with dividend yield of >6% and reasonably safe, you still make some the extra 1%+. Well, I welcome you to share if you have the real experience. 
2. Invest in highly leveraged companies – you are indirectly exposed to leveraging through the company, the risk is similarly high as highly leveraged company has higher chance of bankruptcy during bad times. Obviously, highly leverage companies usually has very high Return on Equity(ROE) as capital is mainly from borrowing and if the company is profitable and managed its cash flow well, the return to shareholders is enormous. The below example is to illustrate the impact of leverage has on both companies (Company A with higher gearing) in identical business and operation with different capital structure.
    
   
    
   If it is loss making, the impact is also amplified in Company A, which has higher gearing.
   Obviously. this is not my cup of tea as I could not forget the impact of 1997/98 Asia Financial Crisis on some highly leveraged companies (eg Lion Group). As you can see, my portfolio mostly consists only of net cash companies except financial institutions (RCE Capital, Tune Protect)  where they rely on borrowed money or other people’s money to do business. Worst if you use Share margin financing for highly leveraged companies, eg if you have used share margin financing for Perwaja or Malaysia Airlines shares, what are you going to do when the share price fall 90%??
3. Invest in derivatives – in Bursa case, warrants – either call/put warrant or company’s warrant. I personally do not touch call / put warrant as it usually has short expiry period (< 1 year) while company warrants usually has 5 years period before it expires (some 10 years). I am more inclined to have a little leverage through company’s warrant on my portfolio to enhance return – the pre-conditions – if  It is “Out of Money” but not too much premium,  better if it is “In the Money” and with discount on the warrant, leverage ratio > 3 times, longer expiry (> 2 years) and must be a good company or at least financially sound. Again, as in any form of leveraging, you can still lose big even in company warrant, imagine if the warrant never get “In the Money” till expiry and all your money invested in this warrant is burnt !

I have only engaged in Type 3 leveraging and very selective on the company warrant I bought and the fact that I still do it, yes, the experience has been good so far. So, is leveraging in stock investment good or bad? There are some strong advocates of Type 1 leveraging on stock investment but there are also many with bad experiences. I believe it is very much depending on individual but my own preference, I don’t invest on borrowed money and yet still wish to leverage a little – hence through selective financial instruments. Your comment and experience are welcome to enhance my knowledge on this area.