Introduction

Consider utilising leverage to enhance your trading power without furthering your cash reserves. This is what leverage denotes in the stock market: a technique to control a larger position by utilising borrowed resources from your broker. Leverage trading is more than just a larger bet; it can work in your favour and add to your margin with your returns, or vice versa with your losses. In this article, we will examine the meaning of leverage in the stock market, its advantages and risks, and tips to consider to inform your trading process better.

Understanding the Leverage Meaning in the Share Market

The short definition of leverage in the stock market is capital borrowed to increase exposure to the remaining assets in your account value, beyond what you could get with your cash. Consider leverage as a multi or max leverage function on a calculator - you have ₹50,000, the broker allows 4:1, so you can enter a trade position worth up to ₹2,00,000. You put that ₹50,000 down as margin, and the broker provides the other ₹1,50,000. You will be charged interest on the funds you borrow, typically 12-18% a year, which will accumulate daily but will be charged monthly. According to the regulatory body in India, being the SEBI, some protection is in place for you and your capital.

Using leverage in the stock market allows you to engage in larger trades without paying the entire amount up front. You can use leverage to trade stocks or indices to maximise the shares you can buy. Just keep in mind that the leverage definition in the share market also refers to the fact that you are sharing the risk of trading, with the broker contributing the funds, you have the liability for the performance of the entire position.

How Does Leverage Trading Work?

You open a margin account with the broker. You will deposit the margin required when you see a trading opportunity, such as a blue-chip stock, such as Reliance Industries. Usually, as per SEBI's margin requirements, this would represent approximately 20% of the trade value for equity shares. The broker will fund the rest, and now you can buy more shares with the available margin. If the stock moves up 5% from where you purchased it, that gain is not just on the net amount you initially deposited, say ₹50,000. Your profit would be calculated on the total value of the position, so in the example, based on a total trade value of ₹2,00,000, you would have made 4 times your investment value in profit after fees.

On the contrary, losses on the entire amount occur if it decreases, and you may then get a margin call requesting more funds to maintain the position. If you don't add more funds, the broker may sell your position to recoup the amounts owed to them. SEBI regulations oversee this process and help keep the market stable but require your attention to guard against downsides.

Markets Where You Can Use Leverage Trading

According to your positioning strategy, you can take advantage of leverage within multiple markets. In the equity market, you can borrow funds to open a position with a margin trading facility (MTF) and hold it overnight. In intraday trading, you can be leveraged up to 5 times your margin cash value, depending on the volatility of the stock and subject to the limits by SEBI.

Futures and options (F&O) are two key areas in which to engage in leveraged trading. In the future, you will pay only a fraction, generally around 10-15% in initial margin, for contracts that have a larger value, such as lots on the Nifty 50. On the other hand, options provide even more leverage, where you can control 100 shares with just a small premium, amplifying any price moves. Furthermore, leverage can be used post equities in forex as currencies will typically trade in pairs, and currency pairs, such as USD-INR, range minimally, thus you would need a leveraged position to make any meaningful profits.

Cryptocurrencies are even more volatile. In India, regulated exchanges do not permit leverage in crypto; it is only available on offshore platforms, which carry high risk and compliance issues. Another form of leverage is using leveraged or inverse exchange-traded funds (ETFs). These ETFs seek to provide multiples of the performance of an index in a single day (i.e. two times or three times the return on the Nifty Index) using swaps and futures. They are good if you want to take a passive approach but want to leverage the returns, but do not use a leveraged ETF for long-term holdings, as the effects of compounding from day to day will slowly erode performance if the market is volatile.

Conclusion

Leverage allows you to act at a level beyond your reach in the booming Indian stock market. Once you have a basic picture of leverage in the stock market, you are on your way to leveraging it in your investment decision-making, as long as you keep balancing ambition and reason. Stay aware of SEBI's evolving guidelines, which focus on investor protection and margin discipline with increasing retail participation. Whether you see value in Nifty highs or sectoral opportunities, understand leverage as a tool, not a gamble. Discipline can result in intentional investing.

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