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What is leverage in Delivery trading?

Share market trading is a very good means to realise one’s financial dreams. Stock trading can get better returns than other investment options. The Indian stock market is also a lucrative market. It is growing at a good pace, and offers significant investment opportunities for both domestic and international investors. You can invest in good assets and carve out a fortune for yourself too. The power of compounding works best in the long term. So, be patient with your investments. A good strategy for long-term investing is delivery trading where you buy stocks and hold them for a long time. A delivery trade involves getting the security purchased in your demat account.

Many people invest in fundamentally strong assets. They wish to gain as the price of stocks increase over time. One can start delivery trading simply by downloading a free stock trading app. An advantage of delivery trading is that one can also pay a fraction of the amount and borrow the remaining part to purchase securities. This facility is what is referred to as a leverage. 

What is leverage

In simple terms, leverage is anything that gives you an advantage over something. So, in the stock market, leverage helps increase a buyer’s purchasing power. It is also referred to as margin trading. Leverage trading is the use of borrowed funds to increase the potential return on your investment. Due to this, you are able to open positions that are much larger than what your starting capital would otherwise permit. The plan is to utilise the extra money to purchase more units of an asset. The trader hopes that the position would generate profits larger than the cost of borrowing. Leverage can boost potential benefits, but it also increases risk. So, in most cases only the experienced traders use leverage while trading.

Terms Related to Leverage Trading 

Here are the key terms about leverage you must be aware of.

Buying power: It’s the money you must have in order to purchase the securities.

Coverage: It is the proportion of the balance to the leveraged sum.

Margin: The sum that your broker requires you to have in case the trade results in a loss. It is a cornerstone of leveraged trading.

Margin calls: If your trading account balance dips below a certain minimum requirement, the stockbroker or financial intermediary may issue a margin call. It basically serves as a warning that the stockbroker can’t afford the level of risk that the position is subjected to. To reach the minimum required amount, you’ll next need to deposit more money into your account. As an alternative, you could cut your losses and close out your trading position.

Open position: When a trade is open, it hasn’t been closed out by any opposing trade. 

Close position: Refers to the investment at the moment it was closed. Imagine that after opening a trade at Rs.210, it increased to Rs.250. To achieve Rs.40 trading profit, close your position at a price of Rs.250.

Leverage Ratio

The ratio between total assets and equity represents financial leverage. The following is its formula.

                Financial Leverage is calculated = Total Assets / Equity 

Some brokers provide leverage ranging up to 100:1 or even higher.  This implies a trader can leverage his trading position approximately 100 times.

Using leverage in delivery trading

These are the 5 guidelines to follow.

  1. Never overextend your leverage. Leave as much room for error as you can. The fundamental premise of leveraged trading is that the less leverage, the better.
  2. Remain invested in dependable and high-quality stocks. Stocks with poor management capabilities may exhibit high volatility.
  3. Continue to keep an eye on the exchange rates and current events. The best approach is to think properly and decide whether to stay or leave  a position.
  4. Keep in mind that the longer one holds a stock investment, the more interest he pays and the lower the amount of remaining returns you receive.
  5. Lastly, employ trading tools like stop losses. Stop loss helps in fixing an exit point in advance. So, you can minimise losses. Trading platforms provide stop losses that are quite useful for traders.

Conclusion

Share India, a leading brokerage house offers a free stock trading app that comes with all such advanced tools. You can open a trading account online and start delivery trading. Traders not only get higher leverage amounts but also negative balance protection. In case of a loss, this essentially freezes your trading account for additional leverage. So, you can keep your losses in check.

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