How it works
Leverage means investing more than your own money, using a loan or a product such as margin trading or futures. The whole position rises and falls with the price, but the loan stays the same size, so every move lands on your own money multiplied.
Position = your money + borrowed money
Your money afterwards = position × (1 + price change) − borrowed money − interest
Leverage = position ÷ your money
With 2× leverage, a 10% price fall becomes roughly a 20% loss of your own money. With 5× leverage, a 20% fall wipes you out entirely.
Worked example
Worked example: Half borrowed, price falls 20%
You put in ₹50,000 of your own and borrow ₹50,000 at 12% a year for six months. The price of what you bought falls 20%.
| Position: ₹50,000 + ₹50,000 | ₹1,00,000 |
|---|---|
| After a 20% fall | ₹80,000 |
| Repay the loan | −₹50,000 |
| Interest: ₹50,000 × 12% × 6 ÷ 12 | −₹3,000 |
| Your money afterwards | ₹27,000 |
| Return on your own money | −46% |
Without borrowing, the same fall would have cost 20%. With half the position borrowed, it cost 46%, more than double, because of the leverage and the interest.
Limitations
- Real leveraged products are harsher. Brokers can ask for more money (a margin call) or sell your position automatically when prices fall, often at the worst moment, so you may not be able to wait for a recovery.
- Losses can exceed what you put in in some products. You still owe the loan.
- Fees and taxes are not included.
SEBI's own study found that 93% of individual traders in equity futures and options made losses over three years. Read investing compared with speculation before using borrowed money at all.