What is Leverage in Stock Market with Example?
In the series of Stock Market Glossary, we are going to cover “What is Leverage in Stock Market with an Example?
Let’s start! Wait Wait Wait before we start I have a suggestion to go through Margin Article as both terms are co-related. Therefore, it will be easy for you to understand the entire concept.
What is Leverage in Stock Market?
Leverage is an investment strategy to use borrowed money to increase the potential returns of an investment.
It works by using a deposit known as margin to increase your exposure to an underlying asset.
Leverage, also known as margin trading, is the use of a smaller amount of capital to gain exposure to larger trading positions.
This can be applied to a wide range of financial markets, including forex, indices, stocks, commodities, treasuries, and exchange-traded funds (ETFs). Leverage stock trading is an appealing option for investors who do not want to pay the full value of the share upfront or take ownership of the asset. However, leverage is double edge sword, the way it amplifies your returns similarly can multiply your losses so be cautious when you’re doing leverage trading.
Usually, intraday traders use a leverage investment strategy to book short-term gains from the price movement. When you’re a novice to this trading then make sure you start with lower leverage than the maximum leverage offered by the broker. This allows the newbie to keep their positions open for the full size even if their returns are negative.
Let’s understand this with an example, suppose you have leverage offered by your broker on intraday equity is 20:1. As an investor, you like to buy 100 shares of HUL trading at Rs.2000 per share. In order to place an order, you need to have Rs.20000 in your account. However, your broker offers you to leverage this position by paying only Rs.1000 and amplifying your returns which at the moment you cannot afford to do. You have placed an intraday order thereby you need to square off your position before the close of the market. Let’s say the price of the stock rose by Rs.30 per share on that day. Further, you place a sell order for 100 shares at Rs.2030 per share.
Therefore, you made a profit of Rs3000 just by paying Rs.1000 to your brokers with the required brokerage +GST. Thus, you can clearly understand by maintaining a margin of Rs.1000 in your trading account you got the leverage position worth Rs.20000 which was otherwise out of your pocket.
Isn’t sound this interesting? Are you excited to start intraday trading with these small tips to ensure you start with small purchases first? Once you start understanding how it works then you amplify your investment amount. Happy Investing Guys with Profitsolo!