While trading stocks, one often encounters terminology which gives the impression of being too complicated and risky for casual investors to understand. That isn’t true. With proper knowledge and comprehension, anyone can create wealth through capital markets – an example being leverage and margins which we will discuss further here as we discuss India’s Top High Leverage Brokers.
Simply stated, we explain the concept of leverage and provide a list of popular stock brokers in India who possess high exposure.
Let’s focus on the fundamentals first.
What Is Leverage, Meaning Leverage in its essence refers to an advantage which yields enhanced results – something we all understand intuitively. But, how is this implemented within the stock market?
Leverage refers to the practice of borrowing capital or debt for investment purposes in order to increase returns significantly. Brokers usually offer leverage so their clients can buy more stocks with fewer funds available, increasing purchasing power in turn.
Leverage: An Example
Let’s use an example to help understand leverage. Say, for instance, one stock from company XYZ costs Rs. 10 today and your trading account contains Rs. 1000; with 40X leverage available through your broker you could buy 4000 shares of that company with just that one amount in your trading account – without spending additional funds!
Investors utilize leverage through margin accounts. A margin account is simply an account with your stock broker that allows you to borrow money for investments at a certain rate of interest. Leverage and margins both involve borrowing capital for investment purposes; however, with leverage being more commonly employed by corporations for fund-raising efforts than individual investors via their brokers.
Why doesn’t Everyone Prefers Leverage?
At first glance, taking leverage may seem appealing; after all it can increase profit. Unfortunately, the higher your potential returns are the greater your risk exposure – in this instance if the price falls from Rs 10 to Rs 5, not only do you stand to lose 50% but all 100% of your capital!
Therefore, using leverage should only be undertaken if you possess detailed research and an optimistic risk appetite on a stock. Since it is essentially borrowing money to invest, its repayment can either bring profits or losses; to put it simply: taking out loans from brokers in order to invest on the stock market with leverage usually requires experienced traders who perform rigorous research on individual stocks before acting with high optimism in regards to future returns.
Also, to manage risk effectively, we offer Stop loss functionality allowing you to set a limit for losses according to your risk profile.
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