LEVERAGE IN STOCK MARKET

The stock market is full of technical jargons and interesting terminologies. As an investor, we need to update ourselves on a daily basis to invest like an expert. Else we all will feel like an outsider and fail to optimise the potential from our investment. So when we explain stock market leverage, you can use this knowledge for your benefit. So without any delay, let’s start and gain a deeper understanding. 

WHAT IS LEVERAGE?

Leverage is something a stock trader is given by the broking firm or broker so they can use it to invest in a stock that they would not be able to afford on their own. So if you are to use leverage, you will be increasing your capability to buy or purchase without spending anything additional from your pocket. Some instances of leverage are buying on F&O (Future and Options), margin, and you are using leverage trading when you borrow so you can gain more. For example, Future contracts are very high leverage instruments as they involves a huge amount and so the broker will ask you to pay only a margin for the deal. The margin you pay will be held by the broker or broker firm.

MERITS AND DOWNSIDES OF LEVERAGE

1. Merits:

• It gives stock traders the potential to have higher profit on each of their trades.
• It amplifies purchasing power which enables people to buy more units with only a fraction of the actual cost.

2. Downside:

• Losses sustained while engaging in leverage trading are way more than what would’ve been there if traders didn’t trade on leverage at all.
• It amplifies the exposure of risk.

POTENTIAL OF LEVERAGE 

Leverage is unsafe under the current margin rules & can result in doubling the profit margins on shares that rise in value. Nevertheless, if the stock bought on the margin decreases in its value, the losses are also multiplied. A 50% reduction on a stock bought with the  maximum possible leverage will result in a 100% wipeout of the investment. 

WARNING

The investor equity is the value of the stocks less the margin loan. If the value of the stocks go down, the broker can ask the investor to deposit more money to maintain a minimum level of investor participation. This level is called the margin maintenance requirements and is 33% of the account value. If the margin call is not met by the investor, the broker is allowed to sell any securities in the account to pay off the margin loan. 

THE CRUX

Leveraging meaning in the share market is essentially a chance to pump up and increase the returns on the trades. But like everything else, it also has risk involved. If you are smart, have knowledge of the markets and can balance your moves, you can benefit. There is always the problem of being over leveraged, so be aware of the risks involved. It can quickly drain your funds if things go wrong so it is always advised to make sure to track positions, use the stop loss feature and not get carried away.