Leverage Trading is a facility provided by Stock Brokers. Which enables the traders to take big positions in the market with less capital required in trading account. If it is used properly it can be more profitable to trader that means Trader can make big profits with minimum capital. Using high leverage can be attractive to trader but carries High Degree of risk if it’s not utilized properly
Worried about Margin Trading?
Margin means the funds need to have in your trading account for taking positions. Whereas Margin trading is a facility under which trader can buy stocks by paying marginal amount of the actual value. This tool is used to increase investor or Trader’s buying power. You are required to pay a certain percentage to open a position, which is also called ‘initial margin’
Let’s understand the concept of Margin trading by using an Example
Let’s assume there is ABC Company whose current share price is Rs.20 and You have Only Rs.1000 in Your Trading account now with that you can buy only 50 shares.
If share price increase to Rs.51 and you close your position you will earn Rs.50 net profit or 1 Rupee per share profit
If you take Margin leverage position your Buying capacity will be increase with same amount of capital i.e. Rs.1000
Assume Your Stock broker (E.g. Upstox) provides 10X Margin Leverage, so your Buying capacity will increase to Rs.10000 (1000*10X)
Now you can buy 500 Shares of ABC company @Rs.20 each. Now If price of share increase by rupee 1 you will be earning 500 Rupees as net profit. with same amount of capital invested i.e. Rs.1000 but in this case you have used margin leverage.
So if you see your profit making capacity will increase if you use margin leverage for taking positions. In first case you were earning only Rs.50 Net profit which is only 5% of 1000 invested. whereas in Second case using Margin leverage you are earning Rs.500 profit which is 50% of Capital Invested i.e. 1000.
But let me warn you it also has its dark side. Margin leverage trading can also increase the degree of risk to greater extent. Just imagine if the Share price of ABC Company had decreased by Rupee.1 You could have made Rs.50 loss in first scenario (With no leverage) and Rs.500 Loss (With using leverage)
So it can be useful only if the positions you have taken are in your favorable market trend, otherwise using margin leverage can wipe out your whole capital.
Points to keep in while using Margin Leverage Trading facility:
- You must close or square off your positions before market closing. otherwise your financial broker will do that automatically at market price. Means if you have bought shares you need to sell it off before market closing or if you have taken short position you need to buy back those shares before market closing
- If you want to carry forward your positions to next trading session you need to convert your positions from Intraday to Delivery by paying Full Margin.
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