Coming across your keen interests in financial markets, you are missing out on a source of high returns if you haven’t learned about leverage yet!
So what is leverage?
Leverage in simplest terminology means investment for returns on debt. That clarifies, using someone’s money, investing it in assets that give returns and paying the debt off with interests.
However, this type of investing is successful when your returns are maximum with covering interests to the lender.
There can be all chances of interest rates being higher than the rate of return from the invested sum. In this case, the losses are ahead.
The best part of this discussed uncertainty is, that if markets are looked up close, a leveraged investor can make high-end gains with very low cost.
Leverage enables investors to come up in the market with small amounts and try out their lucks.
Certainly, to master the leveraged investments, you have to be good with predictions and cautious with analysis.
What is financial leverage in the stock/crypto market?
The most common and traditional financial market also enables its users to be on leveraged money.
In stock markets simple formula of leverage, finances work with two parties, one is an investor and the other is the broker.
You as an investor need to open a margin account. This account is not the Demat account but different from that.
Usually, the sum deposited by you into a margin account is used to assess your leverage requirements.
You are eligible to take up leverage from the broker for half the amount of the margin account balance. This rule varies in countries as well as broker criteria.
Let us get this concept handy with an example.
Suppose you got ₹1000 in your pocket for investing, but the high returns on some companies options tempt you and demand ₹500.
In this case, you can deposit ₹1000 in the margin account and take leverage of the other ₹ 500 from your broker.
Now your broker will invest those ₹500 on your behalf into that security and see for the returns. In case the price runs up to ₹600, you get a return of ₹100. Now your profit is at ₹600 as your invested amount was leveraged.
The margin is subject to interest and you get the profit. in case the price runs down to ₹400, you lose the full ₹500.
This means that the brokers capital sum is run down and he would recover it from the margin account. Again the margin is subjected to the rate of the interest cost.
Here your balance in the margin account will drop to ₹500.
Securities And Exchange Board of India regulates and keep a check on listed securities that are allowed to be traded on a leveraged basis. Not all stocks are enlisted for leverage trading.
The most common use of leverage in the stock market happens in the field of futures and options.
Futures and options are platforms for biding on certain values and thus are popular investing assets for leveraged based investment.
Financial leverage in cryptocurrencies
When talking about financial leverage why forget the hot topic of this decade?
Of course, cryptocurrencies have emerged as a new-gen investment instrument that gives higher returns over a short period.
Now to enjoy these returns, of course, money is the number one requirement.
What if due to the high volatility of the market, you don’t want to risk your own sum?
Guess what, the crypto market also brings you a feature of financial leverage.
Leverage Trading in Crypto denotes a tool that allows investors to make spot transactions (purchase and sale) with the help of borrowed capital from brokers.
Usually, these funds exceed the account balance of the investors.
Here as well the investor can use a very small of his own amount and leverage the rest to bet on crypto assets. In the case of currencies, the margin can go up to 10x times.
The same investor and broker relationship follow for the crypto platforms as well.
The specifications of requirements and feasibility depend on the broker only as cryptocurrencies are not regulated by any authority.
In cryptocurrencies, the margins are much higher for leverage than in stock markets.
For example, if I have ₹ 500 in hand, my margin can still go up to ₹ 5000. This can approximate to 10x or even higher.
For a simple understanding,
In cryptocurrencies, leverage works with liquidating price, entry price and market price.
Suppose you put up ₹100 in from your pocket and the liquidating price is valued at ₹ 95. The entry price stands at which you have opened your trade.
In case of a long deal, if the market price increases to ₹110, your money has incurred a profit with respect to liquidating price and you would be paying a premium on the leveraged amount.
In the case of a short deal, however, the opposite is true, when the market price drops below the entry price the profit signals stars to show up. Premium is mandatory for all deals whether loss or profit.
Talking about different crypto exchanges that provide numerous leverage margins, we have top examples as:-
Binance – leverage can be up to 10x for spot transactions and 125x on derivative tradings
ByBit – this platform enables leverage up to 100x and therefore gives greater power in hands of traders.
Knowing the fact that cryptocurrencies are highly volatile and can go a full 360° merry-go-round in just minutes, do play an important role in deciding the leverage trading.
Essentials of trading on leverage
Planning – planning and judging the potential of returns needs to be assed, the right time for entry-exit is a crucial plan that can give a lot bigger impact on trading.
As the leveraged amount is not yours, you need to assess the risk while planning and then bet on true value.
Within limits– you need to be very cautious about your limits of leverage, as it can quickly erode your money if incurred a loss.
To avoid this depletion, assessing your pocket is a very important factor.
Analysis of mistakes – The first step of mistakes corrections is to analyse what went wrong.
Further investing decisions are much easier when you know what move was wrong in past. Especially in leverage trading, where you cannot afford another wrong decision.
Bottom line
The major portion of the risk in financial markets gets amplified with leveraged based trading. No doubt the risk is much worth it if the timing and decisions are perfect.
On shot knowledge and experience, one can easily bet on leverage whereas lack of knowledge and extra anxious trading can ruin the golden bird benefits you may have caught in your portfolio net.
