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What is Leverage in Trading | Beginner’s Guide to the Stock Market | Module 17

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What is Leverage in Trading | Beginner’s Guide to the Stock Market | Module 17

In this article, we are going to talk about leverage from scratch. Leverage is nothing but an interest-free loan offered by your broker to trade with heavy positions in the market.

For example, suppose you have a 50k account & you want to trade 100 Qty of Reliance shares for Intra-Day & suppose the price of Reliance is Rs 2365. In order to trade 100 quantities of reliance, you need a total of 2365×100= Rs 2,36,500. But that much capital you don’t have in this case. According to SEBI, for equity trading, your broker can give you up to 5X margin, and hence, you can get 1 Reliance share in just Rs 473. (5×473=2355) and the rest of the amount is paid by your broker to the exchange. In simple words, for buying one share of Reliance, you just have to pay Rs 473 instead of paying Rs 2365, but this is applicable for intra-day trading only. You can’t take an overnight equity position with leverage. If you wish to do that, you have to pay the full amount i.e in our case Rs 2365 for 1 share.

● Leverage offered by Brokers in equity intraday trading 

Until this, we have understood what leverage is in trading. Now, we will understand how much leverage is offered by brokers in different segments like equity, future, options, etc. For equity trading, According to SEBI’s margin rule maximum brokerage offered by any registered broker is up to 5x that means, if you have an account of Rs.1,00,000 then you can take positions up to Rs 5,00,000

As we discussed in an earlier example, if Reliance is trading at Rs 2365, with 5x leverage, you just need Rs 473 in your account to trade 1 share of reliance for intra-day. Let’s take another example, Suppose you want to trade with ICICI Bank and the price of one share is Rs 700 and you want to buy 100 quantities. To buy 100 quantities, you need Rs 70,000, but with a 5x margin, you just need Rs 14,000. Once you take the trade, Rs 14,000 will be blocked, and after you close your position, the broker will credit your margin with necessary settlements.

One more important point to notice is, if you want to hold your intraday position overnight, you need the full amount of that trade, in this case, the broker will not offer you any brokerage.

● Leverage offered by Brokers in Future and Options Trading 

1. Leverage for Future

As in the cash market, the buyer gives money to the seller through an exchange, whereas the seller gives shares to the buyer, but in the future market, as the future is a contract both, buyer and seller pay margin to the exchange. All over the world, the margin money is calculated as the percentage of the contract size which is called SPAN margin. The full- form of the SPAN is Standard Portfolio Analysis. In India, in addition to the SPAN margin, the exchanges also ask to pay the exposure margin. So, to trade futures contracts, we have to pay both margin money to exchange that is SPAN Margin + Exposure Margin.

There is no fixed margin for every stock. There are different margin requirements for every stock that basically depends upon volatility and risk associated with that particular stock. You can check the total margin required to trade futures of any stock on https://zerodha.com/margin-calculator/Futures/. Where Zerodha has mentioned total margin i.e SPAN margin + Exposure margin required by FnO stocks to trade in futures.

For trading Nifty and Banknifty futures, the margin is calculated in the same way as the equity futures. As of now, for trading 1 future lot of nifty, the SPAN margin is Rs 85,222 & the Exposure margin is Rs 17,174. So, the total margin required is Rs 1,02,396. This figure changes with volatility and the price of the future. For trading1 lot of bank nifty futures, the total margin required as of now is around Rs 1,42,295.

2. Leverage for Options Trading 

In options trading, as we all know option buyer pays the premium and the option seller gets the premium. For option buying, there is no such thing called leverage. An option buyer has to pay the full premium for buying that particular option. For example, suppose you want to buy a one Banknifty call option which is trading around Rs 100, the lot size of Banknifty is 25. So, for buying this call option, you need a total of 100 × 25= Rs 2500. Here, for buying a call option, the broker will not give you any money, full price must be paid by you only.

Now, speaking about option selling, the margin calculation for futures and margin calculation for option selling is totally different. Now, for option selling also we have to give span margin and exposure margin. Let’s understand this with an example.

Suppose, nifty is at 17000 and you want to sell 17200 CE which is trading around Rs 48. If you want to sell that, the total margin consists of Span margin + Exposure Margin, and there is also one factor called premium receivable i.e the total amount you get if that option expires worthless. Coming to our example, for selling 17200CE, the Span margin is Rs 71,212, the exposure margin is Rs 17,174, and Premium Receivable is Rs 2400 (Calculated on 24th Dec 2021 on a closing basis). Here, the total margin you require for placing a sell order is Span Margin + Exposure margin which is equal to Rs 88,386 in our case.

You may get a question that here the option buyer pays Rs.2400, so why is this amount not getting deducted from the total margin required for placing a sell order. That margin money will show as the credited amount in your ledger after the day ends. So, basically, you are paying only Rs 85,986, but for executing a sell order, the total amount is Rs 88,386.

Also, as you sell far OTM options, the exposure margin will remain constant, but the span margin will decrease, and when you sell ATM or ITM options, the exposure margin will not change, but the span margin will increase.

3. Leverage for Crypto Trading 

As there is no regulatory body for forex or crypto trading, brokers offer higher leverage as compared to Indian Equity or FnO markets. For trading cryptocurrencies, the leverage varies between broker to broker as different exchanges give different margins to their clients.

In some crypto exchanges like Rolbit, you can get up to 1000X leverage for trading Bitcoin & Ethereum. Obviously, you should not take that much leverage for trading any instrument at any point in time.

Delta Exchange, a popular cryptocurrency trading platform that has a simple and user-friendly interface & that I use for trading cryptos offers leverage between 25X to 100X. I recommend that if you are a beginner trader you should not take high leveraged positions. I hope that through this article, I was able to explain to you the concept of leverage & the leverage offered by brokers across different trading instruments. If you have any doubt regarding this topic, then please post it in the comment section.

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