What is leverage trading?

Leverage Trading

Stock market leverage is a method in trading by using which traders are able to trade with more money than their capital. In this, investors can trade by taking a loan from their broker i.e. leverage on the capital lying in their trading account. This helps them to create bigger positions in the market due to which the profit also increases. This technique is beneficial for traders who want to increase their short-term gains.

It is very important to have experience and market knowledge in leverage trading. If used properly, it can be a great tool to earn more profits in less time. But it is also important to note that along with increasing the profit, it also increases the possibility of loss. Therefore, before investing, it is important to do proper research and learn to manage risk.
How does leverage trading work?

Leverage is the process of borrowing money to increase your trading position by more than your entire capital. Let us know how it works:

Leverage Ratio: Traders use leverage ratios (example: 10:1, 50:1) to determine how many times their own capital they can borrow from the broker. For example, if your broker is offering you 5x leverage and you have Rs 10,000 in your trading account, then you can take trades up to Rs 50,000 by keeping Rs 10,000 as margin.

Margin: When you open a leveraged position, you put up a portion of the entire current value as collateral and the rest is borrowed from the broker. The money kept as collateral is called margin.

Profit and Loss: You can build your trading position by using leverage. Leverage not only increases your profits, but it also increases the chances of incurring losses. Therefore, use leverage only when you have good experience in the share market and you are good at closing your position at the right time and managing risk.
Where is leverage trading used?

Stock Market: Leverage is used extensively in the stock market. Here traders use leverage on their capital to create larger trading positions so that they can earn more profits with less money.

Commodity Market: Commodity means the market where commodities like gold, silver, oil, cotton etc. are traded. Like the stock market, leverage is also used in the commodity market i.e. MCX.

Forex Market: Profit is earned by trading currencies of different countries in the Forex market, and here also traders use leverage to a great extent.
Benefits of leverage trading – Benefits of leverage trading

Higher Profit: You can increase your trading position through leverage. If the trade goes in your favor, you can earn many times the profit even with less capital.

Big investment in less capital: Even if you do not have much capital for trading, you can increase the capital temporarily through leverage and take advantage of the good opportunities seen in the market.

Borrowing from Broker: You can borrow money from your broker through leverage. In this way you can take full advantage of all the services provided by them.

Useful in various financial markets: You can use leverage trading in many other markets including stock market, commodity market, forex market etc.

Benefit of market volatility: Due to leverage trading, you do not have to target a large amount as your position increases. If the market is volatile then you can earn good profit even by capturing small moves.
Disadvantages of leverage trading

Higher Risk: Your risk increases manifold with leverage trading. If the trade does not go in your favour, you may suffer a huge loss to your capital.

Market Expertise: To trade with leverage, you should have good knowledge and experience of the share market so that you can manage your trade even in adverse circumstances and come out of it with minimum loss.
Difference between margin trading and leverage trading – Margin trading aur leverage trading me fark

Both the terms margin and leverage are often used interchangeably but there is a lot of difference between them. In margin trading, if the trader does not have capital, he can borrow from the broker by pledging his shares lying in the demat account. This loan depends on the value of the pledged shares, in return for which the investor also has to pay some interest.

On the other hand, in leverage trading, when a trader creates a position, he has to keep some part of his capital as collateral with the broker. On the basis of this, he is able to trade in the market more than his capital. Leverage trading is often used in intraday equities or options and futures and it multiplies a trader’s profits and losses.

Conclusion

Leverage in the financial market has its advantages and disadvantages. It gives both small and big investors the ability to increase their profits manifold in a short period of time. This is a very useful tool for those people who have less capital. But its use without thinking is also harmful for us. Therefore, it is important to first gather necessary experience and knowledge of the stock market and enter a trade using leverage only if there is a good possibility of it going in the right direction.