Leverage is a double-edged sword. Where leverage refers to using borrowed capital, such as debt or financial instruments, to increase the potential return on investment. Leverage allows traders to increase their potential gains by investing more money than they have available. But it also increases the potential risk of an investment because it amplifies the effects of both positive and negative changes in the value of the investment.<\/p>\n\n\n\n
There are various types of leverage that traders can use. One common method is borrowing money from a bank or broker. For example, an investor might borrow from a broker to purchase more stock than they could afford on their own. If the stock rises, the investor can sell for profit and repay the borrowed amount with interest. However, if the stock price goes down, the trader may suffer a loss because they will still be required to pay back the borrowed money even if the value of the stock has decreased.<\/span><\/p>\n\n\n\n For eg. Trader \u2018X\u2019 has a capital of Rs. 10,00,000 and invests in a stock. If the stock prices go up by 20% his capital will appreciate by 20%, i.e. 200,000. And vice versa in case the stock goes down by 20%.<\/p>\n\n\n\n Trader \u2018Y\u2019 has the same capital of Rs. 10,00,000 and takes leverage of 4x (4 times the capital), thereby making an investment of 50,00,000 in the stock. In the case where the stock price goes up by 20%, it makes him a profit of Rs. 10,00,000 thereby making a return of 100% on the capital. But on the other hand, if the stock drops by 20%, he faces a loss of Rs. 1,000,000, wiping out his entire capital.<\/p>\n\n\n\n